Data center, switching play key roles in Cisco's Q2

Company beats estimates with strong quarter in data center, weak one in switching

Data center and enterprise sales helped drive Cisco's better than expected Q2, but a major product transition is crimping switch sales. Data center was a highlight in the quarter, with product sales growing 59% year-over-year.

Enterprise order growth was in the high 20% range, while orders overall were up 8%. Collaboration is on a $4 billion run rate, CEO John Chambers said in the quarterly conference call with analysts.

But switching was a lowlight in the quarter. Revenue was down 7% and Chambers attributed it to transitioning the $10+ billion Catalyst base to new models  and product lines.

"We're in the middle of major product transitions" such as the Catalyst 6000 line to the Nexus 7000 platform, Chambers said. The Catalyst 2000 and 3000 lines are also undergoing transitional churn.

"There are pricing pressures on our existing portfolio," Chambers said. "But we will own the transition and the next evolution in this space. We have managed product transitions many times" over the years.

Nonetheless, Cisco beat the downcast guidance it gave three months ago for Q2. The company posted revenue of $10.4 billion and adjusted earnings per share of $0.37. Consensus analyst estimates from Thomson Reuters were for Cisco to record revenue of $10.24 billion and adjusted earnings per share of $0.35.

Overall product revenue was $8.2 billion, up 3% from last year. Thirty-nine percent of product revenue was from new product categories, like collaboration and video. Routing was up 4%. And Cisco landed 40 new data center customers in the quarter, double that of Q1, Chambers said.

Weak areas in the quarter were public sector, set top boxes, and consumer products, which is 2% of Cisco's business. Order growth in the public sector will be "challenged" in the coming quarters, Chambers said.

For Q3, Cisco guided to revenue 4% to 6% higher than last year's Q3, which is within analyst estimates. And Q4 should be 8% to 11% better than last year's. But Q3 earnings could be off as much as 16% from last year.

"When we look back (on these quarters) we will wish we could have avoided it. But it will make us stronger," Chambers said of Q2 and Q3. "Our strategy is right on course. Our timing is solid on market transitions. But we need to execute better and align our execution with our strategy and vision."

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