Cisco revenues up but profits down

John Chambers CiscoCisco Systems Q2 results show that the networking vendor’s product mix – and particularly the profitability and growth of that product mix – is shifting.

For its second quarter, the networking giant posted earnings of $1.5 billion (U.S.) on sales of $10.4 billion (U.S.), slightly above analyst expectations for the quarter. A year ago, ’s Q2 saw it make $1.9 billion on sales of $9.8 billion.

In a mixed-emotions kind of quarter, the core networking businesses underwhelmed, while newer revenue streams showed tremendous growth and potential.

On a conference call with press and analysts, CEO said the company saw “strong growth in some areas, and challenges in others.”

Here’s a quick breakdown of what worked, and what didn’t, for Cisco on the quarter.

One of the biggest challenges is in the company’s core networking group. While gear was up four per cent year over year, the business saw a seven per cent decline. Chambers said that was a result of competition in the field, as well as an evolution of product lines – new products are being introduced at lower price points that offer the same functionality as yesterday’s top-of-the-line.

“You don’t lose share on that, but you do have a revenue drop and you have to pick that back up,” Chambers said.

One of the big changes was the move from its Catalyst line of switches to Nexus products, a transition that Chambers said is happening faster than expected.  Still, Chambers said Cisco is going to “own its own evolution” and not get into a price war by focusing on a price performance message.  Chambers message to his company: “We’ve got to learn to sell up-market.”

Or, perhaps, Cisco has to continue to diversify its product offerings and its revenue streams. The company’s “new products group” was the star of the quarter. The group, which included data centre, , security and wireless, collectively accounted for 15 per cent growth and contributed to 39 per cent of Cisco’s total product revenue.

The data centre was the biggest growth area, notching 59 per cent year over year growth. Its Unified Computing System servers in particular broke out, representing 700 per cent year-over-year growth, though it’s important to note that UCS was still a fairly new product in Cisco’s arsenal a year ago, having launched in early 2009.

“The data centre evolution is playing out as we anticipated,” Chambers said.

Collaboration saw a 37 per cent revenue jump, boosted by the acquisition of Tandberg, and now abounds for a $4 billion (U.S.) run rate for Cisco. rose 34 per cent to a $1.3 billion run rate.

One other bright spot on the quarter was the company’s services offerings, up 18 per cent year over year and representing 21 per cent of the company’s revenues, with hearty 67 per cent margins to boot.

Chambers said that despite the challenges with the switching lineup, he believes the company is following the right strategy and that customers are buying into Cisco’s architectural view of the network-centric world.

One other challenging field for the company was its consumer offerings. The company’s Scientific Atlanta set-top box business and other consumer offerings proved “more challenging than expected,” Chambers said.

For the third quarter, Chambers predicted revenue increases of between four and six per cent, with eight to 11 per cent increases in its fourth quarter.

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