Cisco Sales Rise But Service Providers Disappoint

Executives see economic challenges remaining for next few quarters. Service-provider revenue grows just 5 percent as companies struggle to charge for new IP services.

Channel powerhouse Cisco Systems reported its first $10 billion quarter and posted better than expected earnings and revenue, events suggesting that the current economic downturn may be shorter than some fear. However, executives said service provider spending was mixed, growing just 5 percent, well below that of enterprise, advanced technology and router sales.

Cisco said sales for the July quarter grew a better-than-expected 10 percent to $10.4 billion, while earnings hit $2 billion, up from $1.9 billion in the same quarter one year ago. The company said revenue for the U.S. enterprise market grew 13 percent, more than double the previous quarter's performance. Cisco forecast growth of 8 to 8.5 percent for the next two quarters, slightly lower than expected.

 In a conference call, CEO John Chambers that the company sees the "same mixed signals in the market from both a U.S. perspective and other parts of the world in terms of economic momentum, stock market behavior, energy costs, and confidence changes."

Chambers added, "While it is very difficult to predict when we may see a stronger spending environment by our customers and return to our 12 percent to 17 percent long-term growth objectives, our best estimate… is that the current economic challenges remain with us for the next few quarters."

However, sales to the service provider customer segment represented one of the company's few disappointments during the quarter.

Chambers, noting that service provider sales now total one-third of Cisco's business, said  "expenditure signals are mixed, both by companies and geographies. With the shift to IP networks firmly having taken hold, we believe we are strongly positioned with the global service providers more than we have ever been before, both from a technology and a business-partner perspective."

Looking ahead to the next quarter, Chambers said the company is closely watching "the U.S.market and the possibility of these challenges in the U.S spreading to other geographies and service providers' long-term growth rates for capital expenditures."

Chambers suggested the latest service-provider sales results might merely result from comparisons to extremely robust sales growth during the recent past. "Worldwide service-provider orders have been growing for three years in a row at a very rapid rate. Fiscal year 2007, as an example, grew approximately 40 percent year-over-year," Chambers said.

In response to a question from an industry analyst, Chambers conceded "actually our U.S. enterprise (business)  was strong than we expected this quarter, while our U.S. service provider (business) was a little bit weaker."

Chambers added the major challenge service providers face is "how they bring the economics to the loads on their networks. When you build out with the capacity that people said before, it takes a lot to absorb that, and it also takes a while for the service providers to transition from charging purely for individual voice connections or for bandwidth speed to the services they put on top. But you are seeing most service providers begin to do that.

"That's a nice way of saying we would not anticipate service-provider spending over the long run not returning into double digits. Time would tell whether that's right or wrong."

(Paul Shread of Internetnews.com contributed to this article.)

TAGS: Cisco,Enterprise,voice,service providers

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