Service provider and cloud growth helped Cisco beat earnings expectations in its fiscal second quarter, which ended January 23. But tough global economic conditions made it a challenging quarter.
Cisco reported $11.8 billion revenue, up 2% year-over-year, beating guidance of 0-2% year-over-year growth and beating estimates by $170 million. Earnings per share were $0.57, beating estimates by $0.03.
Cisco expects fiscal third-quarter revenue growth of 1-4% year-over-year and earnings per share of $0.54-$0.56.
Cisco stock traded at $24.20, up 7.51%, in after-hours trading late Wednesday.
Earnings reports exclude revenue for its set-top box business, which Cisco sold in this quarter and which was in decline. (See Cisco Sells STB Unit to Technicolor for $604M and Technicolor Closes on Cisco Set-Top Business.)
Revenue highlights included a decline in switching, growth in services, as well as big growth in Cisco's relatively small service provider video business.
By sector, service provider grew 5% and enterprise was down 2% year-over-year; however Cisco didn't release detailed numbers.
"We delivered a strong Q2, and are managing the business extremely well in a challenging macro environment," CEO Chuck Robbins said on the quarterly earnings call Wednesday afternoon, reading from a prepared statement.
He laid out four areas of focus for the company:
- Next-generation networking (NGN), based on Cisco's Application Centric Infrastructure (ACI) software-defined networking architecture, which has grown to a $2 billion run rate in just two years, with 100% year-over-year growth in the quarter. Cisco is "aggressively focused on winning in the 10 gig, 40 gig, and 100 gig transition," Robbins said.
- Security: Cisco is focused on growing the business while migrating from hardware to software. The security business grew 11% in Q2.
- Cisco saw double-digit growth in cloud-based and SaaS business, specifically WebEx conferencing, Meraki cloud networking, and security. More of Cisco's portfolio is being delivered in both cloud-based and on-premises models.
- Mergers and acquisitions to augment internal innovation in growth areas: Cloud, security, SaaS, Internet of Things, and analytics. Cisco closed acquisition of Portcullis, ParStream, Lancope 1 Mainstream, and Acano, and announced intent to acquire Jasper Technologies for IoT cloud services, a deal expected to close in the fiscal third quarter. (See Cisco Looks to Jasper Acquisition to Transform Enterprises – & Itself, Cisco Buys IoT Cloud Provider Jasper for $1.4B, and Cisco Boosts Analytics, Security With Acquisitions.)
Robbins said revenue was dampened by uncertainty in financial markets, particular in the last three weeks of the quarter, which correspond with the first three weeks of calendar 2016. Customers are "trying to digest what's going on," he said. "They just paused a bit." The uncertainty particularly affected campus switching, as customers were most likely to hold off on investment in that area, thinking, "our infrastructure is working," Robbins said.
Customers are spending on mission-critical areas, particularly security and next-generation data center. "Where they had the option to wait, they chose to wait a bit," he said.
Cisco's Ericsson AB (Nasdaq: ERIC) partnership is gaining momentum, Robbins said. The companies have begun to close a "handful" of transactions together, but not in a volume sufficient to affect financial reporting for second quarter. "But we do see that accelerating," Robbins said. "That partnership is probably going as well as we thought it would be a this point," he said. (See Cisco + Ericsson: From Soup to Nuts, Cisco & Ericsson Forge Killer Partnership, How Will Cisco + Ericsson Be Viewed From the Front Line?, 'Ciscosson' Aims for Future-Proof Partnership and Cisco + Ericsson: Friends With Benefits.)
Also, Cisco launched a strategy 18 months ago to partner with web-scale companies to meet their needs, and those partnerships are bearing fruit, with business growing 17% last quarter, Robbins said.
On the data center front, Robbins called out a recent InfoWorld articlewith CTO Zorawar Biri Singh outlining the company's plans. In the data center, Cisco plans to focus on microservices and orchestration based on ACI and its UCS standardized servers. Cisco is also working on using streaming analytics for management, with big investments in machine learning and cognitive computing across the entire portfolio, according to the article.
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