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Cisco Focus on Networks Pays Off in Q2 Earnings
Cisco Focus on Networks Pays Off in Q2 Earnings

By Jennifer LeClaire
February 9, 2012 1:20PM

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"Cisco was focused on flip cameras and consumer devices," said analyst Zeus Kerravala. Cisco CEO John Chambers "made the promise that networking was going to be a focus for them last year and it has been. Now margins for switches are returning to what they were three years ago," and Cisco earnings are growing faster than revenue.
 



Cisco beat the street with its second-quarter earnings. The company's net income rose 44 percent in the quarter ended Jan. 28 as Cisco CEO John Chambers continued leading the company out of its 2011 funk.

After a round of layoffs and a renewed focus on its core business, Cisco tallied $2.2 billion in net income during the quarter. That compares with $1.5 billion in the year-ago period. At the end of the quarter, Cisco posted 47 cents per share earnings. Analysts predicted 43 cents per share.

"We are executing well on our three-year plan to drive earnings faster than revenue. Our operational focus continues to yield positive results -- we hit our billion dollar expense reduction a quarter early -- and our ongoing innovation enables our customers to solve their critical business needs," Chambers said. "You will continue to see a focused and aggressive Cisco that is helping our customers use intelligent networks to transform their businesses."

Cisco's Switch Business

Zeus Kerravala, principal analyst at ZK Research, pointed out investor concern for Cisco's switching business in past quarters. It's a valid concern, considering switches are the largest part of Cisco's revenue.

"Much of the industry has been calling for a decline in margins. For a while the margins did decline. Part of that was due to the competitive landscape and some of the products from low-cost providers. I think Cisco was caught off-guard by that because of their lack of focus on networking," Kerravala said.

"Cisco was focused on flip cameras and consumer devices. Chambers made the promise that networking was going to be a focus for them last year and it has been. Now margins for switches are returning to what they were three years ago. For investors, that's a great sign."

Kerravala noted rumblings in the blogosphere about quality. As he sees it, there's a lack of recognition about the difficulty of enterprise networking. Unlike PCs, where anyone can connect machines with some low-end cables, enterprise networking is a challenge.

"Organizations like Cisco, Juniper and Brocade are pushing out the innovation. You just can't throw a bunch of hardware together and have a switch that sells at cut rate prices," Kerravala said.

"Do we really want our networks built to the same quality as PCs today? That would be terrible for the industry. People are willing to pay the extra value for well-built infrastructure with innovative features. That's what Cisco has always been about. Networking is really the right focus for them."

Cisco's Cloud Moves

During the quarter, Cisco completed its acquisition of BNI Video, which supplies service providers with two major video products that offer video back-office and content delivery network analytic capabilities. Cisco also crossed the 10,000-customer mark for its Unified Computing System, which integrates computing, networking, management and virtualization.

Cisco in the second quarter also introduced Cisco CloudVerse, a framework that combines the foundational elements required to enable organizations to build, manage and connect public, private and hybrid clouds, and Videoscape, which helps enable "video in the cloud" services.

Finally, Cisco beefed up its Connected Grid portfolio and announced a series of advances that can give mid-size businesses access to "enterprise-grade" IP phone systems with integrated collaboration capabilities.
 

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