Cisco Shows Strength In Q4, But Supply Chain Still Not Normal

Cisco on Wednesday reported fourth quarter earnings above Wall Street expectations, despite margins that narrowed for the second quarter in a row.

The company celebrated growth in many major product lines and especially in its Unified Computing System (UCS) -- whose customers, Cisco said, nearly doubled since its most recent quarter -- but it also cautioned that ongoing supply chain constraints, while much improved, would continue through the end of calendar 2010.

For its fourth fiscal quarter, Cisco reported profits of $1.94 billion, on 33 cents a share, up about 79 percent compared to $1.1 billion, or 19 cents per share, in the year-ago quarter. Revenue saw a 27 percent boost year over year: $10.84 billion compared with last year's $8.5 billion, which was in line with what Cisco projected in May, but slightly below analysts' most recent projections.

On average, heading into Wednesday's announcement, analysts were expecting Cisco to earn 42 cents per share on $10.88 billion in sales. Excluding one-time items, Cisco would have earned $2.5 billion on 43 cents per share.

Aug. 1 marked the start of Cisco's fiscal 2011. Cisco's profit for the fiscal year 2010 was $7.8 billion, up from the $6.1 billion it posted for its fiscal 2009. Revenues for the year were $40 billion, up from $36.1 billion in 2009.

On the company's Q4 earnings conference call, Cisco Chairman and CEO John Chambers described the quarter as "very strong" and said Cisco closed its fiscal 2010 "in a tremendous position of strength."

"My confidence has never been higher," Chambers said.

"We're doing well versus our competitors," he added later in the call. "I'm very comfortable with where we are."

Cisco ended the quarter with record revenue and nearly $40 billion in cash, Chambers noted. It also added about 2,000 employees during the quarter, not including employees gained through acquisitions, and of those employees, 70 percent were in the U.S., and of that number, 60 percent were in California, he said.

Overall product orders, Chambers noted, were up 23 percent year over year. All of its major sales theaters grew between 20 and 35 percent, except for Japan, which Cisco described as flat.

Next: Chambers Addresses Supply Chain Issues

By technologies, Cisco's advanced technologies grew 27 percent, switching grew 27 percent, and routing grew 15 percent. Among product families, Chambers highlighted CRS (Carrier Routing System), at 20 percent, now on pace for a $1.2 billion run rate, ASR (Aggregation Services Router) and Nexus, as well as tremendous growth for UCS, which according to Cisco jumped 90 percent to 1,700 customers from 900 in the third quarter.

Supply chain constraints have been a sore point over the past year for Cisco channel partners, many of whom found Cisco's public response to the issues -- and guidance to the Cisco channel on what to expect -- lacking.

Chambers said Cisco had been "aggressive" in helping to set and meet customer expectations, without getting into specifics.

"Supplier lead times appear to have stabilized but are still longer than we would like," Chambers said, noting that Cisco had returned to a "normal range" for the "vast majority of products." Later in the call, Chambers said it was impossible to quantify whether supply chain constraints had harmed Cisco's growth.

Frank Calderoni, Cisco executive vice president and CFO, also touched on the supply chain constraints: "Our best estimate is that these challenges could continue throughout the remainder of calendar 2010."

During his presentation, Chambers spotlighted cloud, video, consumer, collaboration, data center virtualization and emerging countries as key "adjacencies," as well as energy and smart grid, sports and entertainment and health care as prime areas of new growth for Cisco. Key acquisitions like those of Tandberg and Starent are contributing well to the bottom line, he said.

Cisco's ability to be an "innovation and execution engine" is the key takeaway, Chambers offered. He said Cisco's triumphs in architecture and data center will continue with some "key large wins in this area during the next year" and will put "expanding pressure on our industry peers to make similar architectural moves."

At a macro level, Chambers admitted to seeing "mixed signals in market and customer expectations."

The U.S. Federal Reserve's comments Tuesday about the slowed economic recovery were comments "most of our large customers that I've talked with recently would agree with," he said.

Cisco shares were down 4.4 percent in after-hours trading Wednesday.