Is Cisco back?

Feb 09, 2012

Michal Lev-Ram has been a senior writer at Fortune since 2011, writing frequently about technology.

FORTUNE -- Cisco’s turnaround efforts are starting to pay off -- slowly. The networking equipment giant released better-than-expected profits and sales on Wednesday, but it still has a long road ahead.

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First, the numbers: Cisco (csco) reported second-quarter profit of $2.2 billion, up from last year’s $1.5 billion. Revenue came in at $11.5 billion, compared with $10.4 billion a year ago. The San Jose-based company also reported that it had reached its goal of eliminating $1 billion in expenses a quarter ahead of schedule. "We are executing well on our three-year plan to drive earnings faster than revenue,” Cisco CEO John Chambers said in a release issued on Wednesday. “You will continue to see a focused and aggressive Cisco that is helping our customers use intelligent networks to transform their businesses."

Just last year, Cisco was getting its butt kicked by competitors. Margins had significantly deteriorated and its bloated portfolio of products lacked focus. Chambers made some painful but necessary cuts, laying off about 10,000 employees and shutting down distractions like the company’s consumer-facing Flip line of camcorders. He also said Cisco would make a more aggressive push against competitors like Juniper Networks (jnpr) and Hewlett-Packard (hpq), refocus on the company's core switching and routing products and improve margins. So far, it appears Chambers is delivering on his promises. “Innovation, speed, and agility is in,” Chambers said in a call with investors on Wednesday. “Cost and complexity is out.“

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Cisco's core routing and switching products made up nearly 50% of the company's revenue in this most recent quarter. But several of its smaller business segments are growing fast. Data center revenue, for example, was up 88%. At $333 million, it still makes up a small fraction of Cisco's overall revenue though.

Of course, Cisco isn't out of the woods quite yet. Investors are looking for Cisco to improve -- not just stabilize -- margins. And while Chambers has managed to start turning things around relatively quickly (for a company of Cisco’s size), his outlook for the current quarter was conservative: Cisco expects revenue to grow 5% to 7% from the year-ago period. What's more, while competitors like Juniper and HP are dealing with their own problems at the moment, China-based Huawei is making a big push for the North American enterprise market. And that,along with economic uncertainty in Europe and a decrease in government spending, has got to be keeping Chambers up at night.

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