"Recovery Is Well Under Way," says Cisco's Chambers

Cisco just announced earnings for its first fiscal quarter that beat Wall Street’s expectations by a wide margin, as well as its own expectations. The company posted revenue growth of 5%, far higher than the 1% to 3% it forecast three months ago. Operating margins of 29% and gross margins, at 66%, were also well above expectations. Those gross margins were the best in four years, CEO John Chambers told analysts on the conference call now underway.

He said that he expects we’ll look back and see this as “a major inflection point.” He believes the economy bottomed out in the first calendar quarter of 2009, began to recover in the second quarter and gained real momentum in the third. “The recovery is well under way,” said Chambers.

Among many highlights, the company saw flat order growth in the US for the quarter ended on Oct. 30—a massive improvement from the 20% year-on-year declines of the last two quarters. While small businesses and phone carriers were much improved, the highlight was spending by US corporations. “We’ve seen a much faster recovery in their business than we had expected. The company seems to be well on the road to recovery,” says Pacific Crest analyst Brent Bracelin. Indeed, Chambers forecast positive revenue growth in the current quarter, and even said it would begin limited hiring—though he warned any employees listening to the call that it would be “very targeted” on jobs that drive productivity growth or help grow into new markets.

The company warned shareholders not to assume the second half of the year would remain strong, and advised analysts not to update their models for the second half of the year given uncertainties about job growth and the sustainability of the recovery. “I just don’t want us to get ahead of ourselves,” said Chambers.

Still, the company did give a forecast for the current quarter, saying that it expects year over year growth of between 1% and 4%. That’s in line with recent years, when the company averaged 3% growth in its second quarter—and much rosier than Wall Street analysts, who expected a revenue declilne. Gross margins could fall, due to product mix and some less expensive new products.

Given Cisco’s huge size, product breadth and importance as a proxy for the health of the Internet, this is great news for tech in general. Bracelin notes that this marks the tenth out of twelve companies that sell primarily sell to corporations that has exceeded Wall Street expectations.

Some in the press have been raising questions about Chambers’ long-term strategy, particularly the amount it has spent on acquisitions and on moving into dozens of “market adjacencies”—from Flip video cameras to heavy duty servers. Bracelin isn’t one of them. With so many companies moving to virtualized data centers, “Cisco’s goal is to be there as companies go through the biggest transition in many years,” he says. “I think Cisco is doing all the right things, and it’s way too premature to judge Cisco’s strategy, when we’re just coming out of the worst downturn since the Great Depression.”

Certainly, Cisco seems as confident as I’ve ever seen it—and maybe more confident than any company I’ve ever seen. As Chambers pointed out, it did four large acquisitions in the last month, including $3 billion acquisitions of wireless services infrastructure company Starent and videoconferencing specialist Tandberg (although the bill for that deal may go up, given protests by Tandberg shareholders). What’s more, the company is clearly ignoring critics who doubt that strategy. The evidence: the company okayed a $10 billion stock buyback. As Chambers told analysts, “There are some CEOs that are stepping on the gas pedal, but very few are doing what we’re doing and pushing the gas pedal down all the way.”

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