Cisco profits dip, but still beat the Street

Updated 5:37 p.m. PDT Comments and analysis added from Cisco's conference call.

Cisco Systems reported quarterly losses on Wednesday, but the company still managed to beat Wall Street analyst expectations as its CEO cautiously reported that business customers are feeling better about the economy.

Based on non-GAAP, or non-generally accepted accounting principles, the networking equipment maker reported earnings of 30 cents a share on sales of $8.2 billion. Analysts had expected the company to report earnings of 25 cents a share on revenue of $8.1 billion.

Cisco said sales of its products were down about 17 percent during the quarter due to the sagging economy, but that the company was able to manage through the difficult quarter and post better-than-expected earnings results due to strict cost cutting during the quarter. CEO John Chambers said that revenue for next quarter, the company's fiscal fourth quarter, will likely decline at the same rate. Specifically he said he anticipates revenue to be down between 17 percent and 20 percent compared with the same quarter a year ago. But he said that he is finally seeing signs of hope that the gloomy market could be turning.

"For the first time in many quarters, many global customers are describing business in a different way," Chambers said during the company's conference call with analysts and investors. "They are seeing stabilization, finally having something reasonably solid beneath their feet."

Still, Chambers cautioned that it is difficult to say that the economic downturn had hit bottom. He said that things could get worse again, and he added that Cisco's business customers expect results for the entire year to be lower compared with the previous year.

"I'm not calling this the bottom or the beginning of an upturn," he said. "But things have to level out before they can go up. It will take a couple of quarters to turn things around. I don't think it will happen all at once. It will be gradual. (But the situation) feels better now than it did a quarter ago."

Chambers added that "a month and a half ago people were the most pessimistic I had ever seen them."

Still, he said that an economic upturn is on the way. And when it happens, he believes Cisco is positioned to take advantage of it. The company has been aggressively investing in 29 new markets that Chambers says are adjacent to Cisco's core routing and switching markets. These include things, such as data center computing, video products, and the consumer market.

"No one knows for sure when an upturn will occur," he said. "But we are being aggressive to get ready for when it does happen."

As Cisco invests, it's also working hard to cut costs. And Chambers applauded his management team and all of Cisco's employees for pinching pennies and executing on important product launches. Some of the cost cutting that has helped Cisco save money comes from curtailing hiring and merging offices. The company also cut about $400 million from its travel budget by using its own telepresence and other Web 2.0 tools to hold meetings and collaborate remotely.

Chambers used himself as an example of how the company has used telepresence. He said that he made 262 customer visits around the globe during the quarter. About 200 of those meetings were done virtually using Cisco's telepresence equipment. In total, Cisco employees participated in 4,700 telepresence meetings during the quarter

Chambers said that Cisco's customers also see the value in telepresence, and he reported that sales of telepresence gear grew by 70 percent during the quarter compared with last year. He also said that about six customers already have more than 50 telepresnce units, and some are talking about installing hundreds of systems.

Telepresence uses giant TV screens and high-speed Internet connections to create a fully immersive video conferencing experience that allows callers to sit across a table from each other and feel like they are in the same room. The systems cost hundreds of thousands of dollars each, but they help companies reduce travel expenses.

As Cisco moves forward, Chambers is confident that the company will be able to continue aggressively investing in new businesses, while tightly managing its expenses. So far, it looks like the company has done a good job of this. But as Cisco digs deeper into new markets, I wonder if the company is spreading itself too thin.

Cisco is also facing stiff competition in one of its core markets, Ethernet switching. IBM has recently gotten into the market using equipment from a new partnership with Cisco rival, Brocade. And Hewlett-Packard is also starting to take market share from Cisco in the low-end switching market. These companies that had once been major Cisco partners are now turning into high-stakes rivals. Chambers said he is confident the company can hold its strong standing in the market. And he added that he isn't worried about turning partners into competitors.

"Some of our past partners will be partners in the future," Chambers said when asked about the increasing co-opetition between Cisco and IBM and HP. "But as we go into new areas, some won't be. When you think of us moving into 29 adjacent markets and you think of all the different partner sets, that's a broad range companies. So there will be times when some partners say that we're a little too close (to what they do.) And there may be times when we say it."