Cisco Hits Air Pocket as Cable, Government Revenues Fall

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Is there trouble ahead in 2011 for the tech industry?

Networking giant Cisco reported its first quarter fiscal 2011 earning this week, showing weakness in a few sectors and providing a very conservative outlook for the next quarter.

There were a number of key bright spots for Cisco during the quarter, with growth in its UCS server business and the first shipments of its high-end CRS-3 core routing platform.

Cisco reported first quarter fiscal 2011 revenues of $10.75 billion, an increase of 19 percent on a year-over- year basis. Analysts polled by Thomson Reuters were projecting revenues of $10.73 billion for the quarter. Cisco’s net income for the quarter was reported at $1.9 billion, an increase of 8 percent. Looking forward, Cisco provided revenue guidance for the second quarter of its fiscal 2011 for year-over-year growth of between 3 and 5 percent.

“First of all, our view on this guidance is we’re disappointed,” Cisco CEO John Chambers said during the company’s analyst call. “This is something that if we were to look back just a quarter ago, we expected it to be in the mid-teens or higher and that’s what I think our growth rates should be. If you look, we’ve got a couple of air pockets that we hit. You adjust to those air pockets as you go through in terms of the direction.”

The air pockets that Cisco hit include a decline in some areas of public sector spending, as well as areas of their service provider business.

“We had solid orders growth in the mid-teens or better in the U.S. federal public sector and also the emerging markets public sector,” Chambers said. “However, we did see challenges, for example, in the U.S., state government business, down in Q1 approximately 25 percent year-over-year from an orders perspective.”

Cisco is also facing increasing pressure in its set-top cable business, which declined in North America by over 40 percent in the first quarter.

One of the things that Cisco is doing with its money is growing its employee base. Chambers noted that his company added 1,900 new employees during the quarter, Cisco now has 72,600 employees in total globally.

In terms of product growth, Chambers reported that Cisco’s routing revenues were up by 13 percent year-over-year while switching was up by 25 percent. An area of router growth highlighted by Chambers was the ASR product family, with year-over-year growth of 200 percent at an annualized run rate of $1.4 billion.

The first quarter also marked the first shipment of Cisco’s CRS-3 core routing system.

“We received $51 million in orders from 30 customers,” Chambers said. “However, we expect there will probably be several more quarter before we see rapid increase in these accounts from high-end routers as they test out all the new systems of this magnitude before they begin volume commitments.”

On the switching side, Chambers reported that Nexus switching revenues grew by 120 percent and saw an annualized run rate of approximately $1.5 billion.

Cisco UCS (Unified Computing System) server revenues continue to grow at a rapid pace as well. UCS revenues grew by 550 percent on a year-over-year basis. Chambers noted that Cisco currently has 2,800 UCS customers, up from 900 in the third quarter of fiscal 2010.

“We are also starting to see many of these systems now going into production rather than initial pilot systems,” Chambers said. “Over the next several quarters, we hope to start seeing our first large orders for major data center implementations. Cisco, for example, has over 2,500 UCS systems in production, and so far they have been rock solid.”

With the UCS, Cisco is competition against traditional data center vendors like HP and IBM. While on the routing side, Cisco continues to face competitive pressures from Juniper and other rivals. Overall, Chambers is confident that his firm will come out on top.

“So, are there couple areas where competitors have gained some momentum? Yes. There will always be,” Chambers said. “If there isn’t, you probably aren’t in good markets, but in the majority areas, I am very comfortable with where we are and where we are going.”

Sean Michael Kerner is a senior editor at InternetNews.com, the news service of Internet.com, the network for technology professionals.