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Q4 challenges not a downturn, Cisco CEO says

Company dysfunction not the culprit this time either; clouds bringing brighter days?

After marked improvement in its business following the wrenching restructuring and "reinvention" Cisco's gone though over the past year, the company - and perhaps the industry - are not out of the woods yet.

Cisco's current quarter, the fourth in its 2012 fiscal year, is likely to come in well below Wall Street expectations due to ongoing economic challenges - particularly in Europe - and conservatism in enterprise IT spending. Cisco's Q3 came in as planned last week, but the company's forecast for Q4 sent Cisco's stock plummeting and the markets downward.

"We are still in an uncertain environment economically and in global perspective," Cisco CEO John Chambers told analysts during the company's Q3 conference call last week, the same week of the Interop 2012 and CTIA industry trade shows.

Lingering issues from past quarters continue: the European debt crisis, sluggish public sector spending, and tight IT purse strings. But Europe and customer conservatism have gotten worse, Chambers noted.

"As you have seen in our enterprise order growth and the trends over time, we are seeing a hesitant spending environment," he told the analysts during the conference call.

But it's too early to call the trends a downturn. Nor is it emblematic of a return to dysfunction in Cisco's own operations, Chambers noted. Thirdly, competitors are not eating Cisco's lunch - quite the opposite, as Cisco's been gaining share on them, Chambers claimed.

As an example, Chambers cited sales of the UCS server platform. Sales of the system grew 57% from last year while Cisco's two largest data center competitors experienced flat or negative growth in the quarter, he said.

The softness in Q4 is instead coming from longer sales cycles and smaller deal sizes, in addition to challenges in the global economy.

Some highlights in Cisco's Q3: switching and data center. Switching revenue was up 5% from a year ago, and profit margins on the Nexus 7000 are closing the gap with the Catalyst 6500. The Nexus 2000 and 5000 combined grew 75% from last year. Nexus 10G orders grew 40% from last year, and ports 90%.

Data center revenue grew 67%.

Lowlights: collaboration was flat due to market dynamics and lack of execution; routing was flat - even though high-end routing was up "significantly" and ASR 9000 revenue up 80%; and TelePresence was hit by decreased spending in public sector and enterprise.

Despite the near-term challenges, Cisco is very bullish on its prospects in cloud, even after losing a significant enterprise private cloud deal with an Illinois hospital network. The company is at a $1 billion order run rate with service provider cloud implementations, and over 70% of the "leading" cloud providers are using Cisco's CloudVerse framework as a blueprint for building out their infrastructures, Chambers reports.

"I am extremely pleased with the traction we have made in cloud," he said in the conference call.

He added that there are 10 "key" massively scalable data center and Web 2.0 customers, and nine of the 10 are using the Nexus platform to run their applications and services.

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