Cisco (NASDAQ:CSCO) this week reported second quarter results that beat estimates, but the company gave a disappointing outlook because it expects public sector spending to worsen over the next few quarters.
Second quarter revenue was $10.4 billion, up 6%. Cisco had forecast revenue in the range of $10.1 billion to $10.3 billion. Net income was down 17.9% to $1.5 billion or $0.27 per share versus $1.9 billion or $0.32 per share last year. Adjusted EPS was $0.37 versus analyst estimates of $0.35. Gross margin was 62.4% down from 64.3% in the first quarter and 65.6% last year as the company had an overall mix shift toward lower-end products in the portfolio related to multiple product transitions, primarily in its switching business.
“I think that’s a way to cover up that they are facing competition in their more mature business lines and that they are most likely going to use price as a weapon to hold market share, and this is going to pressure earnings and margins.”
But he maintains that Cisco is a solid bet in the long term because its switches and routers are critical to growing Internet and mobile traffic.
Switching revenue was $3.15 billion, down 7% y-o-y. Routing revenue was $1.7 billion, up 4% y-o-y, primarily driven by 5% and 6% increases in the high end and low end, respectively. New product revenue totaled $3.2 billion, representing an increase of 15% y-o-y. Data Center saw strong growth of approximately 59% and Collaboration, which includes Tandberg, an increase of approximately 37%. Security was down 9% y-o-y and Video Connected Home was down 4% y-o-y, while Wireless was up 34% y-o-y.
From a customer segment perspective, sales to the enterprise sector grew 10% y-o-y, the public sector grew 7% y-o-y, and consumer product sales declined 15%. In the US, public sector orders grew 9% y-o-y but Cisco expects the public sector growth to be severely challenged over the next several quarters and will most likely grow in the mid- to low- single-digits.
“CEO John Chambers blamed the slowdown on the tightening budgets in the public sector, particularly in the U.S., Japan and Central Europe, indicating a slower recovery that previously thought. But other technology companies later reported stronger growth, stoking concern that it is facing company-specific issues.”
For the third quarter, Cisco expects only 4% to 6% revenue growth. It expects growth to improve to 8% to 11% in the fourth quarter. Fiscal year 2011 revenue growth is projected to be in the mid-to low-end of its previously mentioned range of 9% to 12%. Analysts expect third-quarter revenue to grow 5% to $10.85 billion and fourth-quarter revenue to grow 8% to $11.69 billion. For the year, analysts expect revenue to grow 9% to $43.5 billion. Cisco’s annual revenue in 2010 was $40 billion.
Following its conservative forecast, Cisco’s share price dipped, and it is trading around $18.93. It hit a 52-week low of $18.79 yesterday.
During the quarter, Cisco repurchased shares for $1.8 billion and ended the quarter with a cash balance of $40.2 billion, compared with $38.9 billion last quarter. Cisco recently announced plans to acquire LineSider Technologies, Pari Networks, and Inlet Technologies.
LineSider is a provider of network management software that helps customers build the network services necessary to securely create and deploy cloud computing infrastructure.
Based in Milpitas, California, with part of its employee base in Hyderabad, India, Pari Networks is a leading provider of network configuration and change management (NCCM) and compliance management solutions. Cisco expects to integrate Pari Networks’ technology into Cisco’s smart services.
Inlet Technologies is a leading provider of adaptive bit rate (ABR) digital media processing platforms. Cisco expects this acquisition to strengthen the capabilities of its Videoscape TV platform, allowing service and content providers to deliver video to any device over any Internet protocol (IP) network.
While Cisco was expanding in other markets, competition from HP-3Com, Juniper, and F5 Networks has intensified. Cisco said that only 46% of its revenue came from routing and switching. Cisco attributed its poor performance in switching to “transition,” but it is clearly losing out to the intense competition.