By Peter Burrows
Here's one that would have been unimaginable just a few years back: John Chambers, the chief executive of networking giant Cisco Systems (CSCO ), crowing in a conference call with financial analysts about posting a measly 2.1% sequential increase in quarterly revenue growth. Even more amazing, however, is the reaction from analysts. "Hey, it was a good quarter," says JMP Securities' Sam Wilson. "And the tone on the conference call was better than I'd heard in a long time."
Indeed, Cisco beat analysts' expectations on a variety of fronts in a tech spending environment that proved difficult for other industry giants like IBM (IBM ) and Microsoft (MSFT ). Analysts had expected Cisco's sales to jump just 1.6% from the previous quarter in what is usually a seasonally tough one for the company. But, thanks in part to strong sales to phone and cable companies, it hit that 2.1% number by posting net sales of $6.2 billion. The company also maintained its profitability, with net income of $1.4 billion, vs. $1.2 billion a year earlier. "This might be the first [fiscal] Q3 in which instead of having my hair fall out, I actually grew some hair," said Chambers. "We had a super last month."
The best news, however, involved the future. Normally extremely cautious, Chambers repeatedly talked about how "comfortable" and "pleased" he felt with product order rates. Indeed, Cisco predicted it would post 10% year-over-year growth in the current quarter. If it delivers, the company should post annual 2005 sales growth of around 12%. "What he was saying is that 'we're pleased with last quarter, but we're even more pleased with how this quarter looks,'" says Wilson.
Sales to phone and cable companies rose 25% over the same period last year. Still, despite major investments and well-hyped products, Cisco has lost ground in this critical market in recent years to companies such as Juniper Networks (JNPR ). While it's not clear whether Cisco is regaining share, this quarter's performance suggests it's now at least holding its own, says Wilson.
What's more, Chambers spent a good deal of the 90-minute analyst call describing Cisco's stability. With operations around the world and products ranging from $79 home routers to $1 million industrial-class routers, it's proving to be a very stable ship, he says. Why? Because when one sector runs into a snag, others compensate.
MANY EGGS, MORE BASKETS.
For example, while sales in Japan and Germany were weak last quarter, those in the U.S. and Britain were strong. While sales to federal buyers stagnated, the big phone and cable companies made up for it. "It's one of Cisco's great strengths," said Chambers, who noted that no geographic region, product line, or market segment has had the highest order-growth for more than a few quarters in a row.
Of course, Cisco is nowhere near the growth-company it was in the late-1990s, and many analysts still have concerns about its ability to find billions in new revenue each year to hit its 10%-plus revenue-growth target, while maintaining its 65%-plus gross margins. But for the short term, things are looking less complicated. Asked about the downturn in March reported by IBM and others, Chambers said, "We did not see the ugliness that other people saw. We were extremely pleased with the quarter."
With good reason.
Peter Burrows is Computers editor in BusinessWeek's Silicon Valley bureau