Cisco reported its second consecutive quarter of improved earnings on Wednesday, putting a streak of bad quarters behind it. However, service provider sales were down -- and CEO John Chambers doesn't expect those sales to bounce back soon.
That's a big change from calendar 2014, when Cisco saw consecutive quarters of declining revenue. (See Cisco Busts Slump Despite Carrier Slowdown and Cisco to Ax Up to 6,000 Jobs, But It's Excited About SDN.)
Service provider revenue was down 1% year-over-year -- bad, but much better than the 10%-or-worse declines that Cisco has been averaging the past five quarters, Chambers said on an earnings call Wednesday. He singled out service provider video spending as particularly problematic, down 19% year-over-year to $776 million.
Emerging markets also spelled trouble for Cisco.
Cisco expects service provider capex spending will decline this year, with experts predicting the worst in the next six months. Gains to Cisco will come from "wallet share" and "market share," Chambers said -- in other words, taking business from competitors. "We're now winning big service provider deals we would not have even been in the game with a year ago."
Switching grew 11%, with particular strength in the Nexus Application Centric Infrastructure portfolio -- Cisco's SDN architecture -- including the Nexus 3000 and 9000 switches. "The market has recognized the benefits of ACI as compared with PowerPoint concepts of aspirational competitors," Chambers said.
Cisco feels confident competing against white box switches based on ability to offer a complete architecture including the data center, cloud, collaboration, big data and mobility -- and particularly security.
"This is where we're going to crush the white label people," Chambers says. "If you just say hey I'm going to get merchant silicon and throw software on top of it and run data centers and run WANs and run everything, all it takes is one breach and you've done more damage to your brand as a company or as a government than you could in a hundred years of saving a little bit on switching difference."
Chambers said he expects mid-single-digit growth in switching in the future.
Wireless had a strong quarter as well, up 10% year-over-year. Cisco's Meraki cloud network management platform saw "stellar growth," up 100% with an annualized run rate of $400 million. "That's hotter than almost any startup in the industry, with great gross margins," Chambers says. (See Cisco: Software, Cloud to Be 'Main Focus', Cisco Gives Its Software Licensing a Makeover and Meraki Co-Founders Say Sayonara to Cisco.)
For third-quarter guidance, Cisco predicts 3-5% revenue growth for $0.51-0.53 cents non-GAAP earnings per share.
Cisco increased its quarterly cash dividend to $0.21 per common share, up $0.02 over the previous quarter.
Chambers attributed Cisco's turnaround to more than three years of company transformation, focusing on cloud, mobility, big data, security, collaboration and the Internet of Everything (as Cisco calls the Internet of Things).
Recently, Cisco reorganized its 25,000-person engineering team to improve customer responsiveness, streamline development, and reuse technology across the company. (See Troubled Cisco Looks to 'Bust Silos' .)
Total headcount at the end of the quarter was 70,112, down from 72,247 at the end of the preceding quarter.