Cisco Systems Inc. ( CSCO ) delivered a sign of improving tech-sector demand as the company’s newer software and services businesses more than offset weaker revenue from its traditional networking products.

The San Jose, Calif., company’s fiscal third-quarter profit grew 14%, topping Wall Street’s expectations after a slew of negative results from peers in the information-technology industry.

“Enterprise growth is on a very good trend,” Chairman and Chief Executive John Chambers said during a call with analysts. “It’s nothing to write home about, but it’s very solid economic growth”

Cisco said it expects its core profit to reach between 50 cents and 52 cents a share this quarter, bracketing analysts’ average target of 51 cents, according to a poll by Thomson Reuters. Its revenue target left more room for surprises, calling for 4% to 7% growth. That implies some $12.7 billion to $13.07 billion of revenue; analysts were expecting $12.47 billion.

Shares jumped 8.5% to $23.01 as improving product orders added to optimism around the company’s results. As of Wednesday’s close, the stock was up 7.9% so far this year.
Cisco, the world’s largest supplier of Internet routers and switches, often warned of sales headwinds last year as corporate and government customers tightened spending, adding pressure on the company to diversify its revenue base with more profitable software and services.

The company continued shuffling its product portfolio this year by integrating new acquisitions of mobile-phone technology and Wi-Fi software. It also sold its consumer-focused Linksys home-router business to Belkin International Inc.

Mr. Chambers said the company’s evolution to an IT services provider from a communications equipment maker helped to drive its results in the latest quarter. The benefits came as other network-focused rivals struggled, he said.

“The communications companies have had a pretty tough run this fiscal year,” Mr. Chambers said.

Cisco’s product orders, which flatlined during the previous quarter, grew 4% in the most recent period. Orders by television and telecom service providers picked up 8%, while public-sector customers grew a slower 1%.

For the quarter ended April 27, Cisco posted a profit of $2.48 billion, or 46 cents a share, up from $2.17 billion, or 40 cents a share, a year earlier. Excluding stock-based compensation expenses and other exceptional costs, per-share earnings rose to 51 cents from 48 cents.

Revenue was up 5.4% at $12.22 billion.

In February, Cisco predicted adjusted earnings of 48 cents to 50 cents a share and revenue growth between 4% and 6%.

Revenue from video service providers jumped 30%, while sales of network switching gear, the category in which Cisco made its name, slipped about 2%. Sales of next-generating routing products were flat.

Overall product sales grew 5%, while revenue from its services segment increased 7.1%, boosting the company’s overall profitability. Gross margins ticked down to 63% from 63.1% a year earlier.

That moderate decline showed Cisco is having success keeping its profitability roughly in tact despite fierce competition from other network gear makers, according to ISI Group analyst Brian Marshall.

“If they can really maintain this low 60s level for the next couple of years … that could be a material move higher,” he said.

Source:http://www.nasdaq.com/article/2nd-update-ciscos-profits-rise-aided-by-software-services-growth-20130515-01530

Cisco Systems’ “transformation” into a more software- and services-centric company is far from complete. Over the next five years, the San Jose-based networking equipment giant plans to double the amount of revenue that comes from software from $6 billion to $12 billion. To that end, it’s announced a string of software-related acquisitions, including SolveDirect, a maker of network services management tools, and Israel-based Intucell, which sells software for mobile operators, among others. It’s also shifted gears in its collaboration business, which grew just 3% from 2011 to 2012. Cisco (CSCO) is now focusing on delivering videoconferencing services over the cloud to any screen–not just pricey TelePresence rooms–and allowing more interoperability with other collaboration tools like WebEx. Last week, the company announced that customers will be able to invite users outside of their company to participate in TelePresence meetings via the WebEx service on their web browser. Fortune recently caught up with Robert Lloyd, president of Cisco development and sales (and possible successor to CEO John Chambers) to hear more about the company’s plans to revamp its collaboration business, and to get his take on the recent “working from home” debate sparked by Yahoo CEO Marissa Mayer.

Fortune: What’s the status of Cisco’s collaboration business, which seems to have dipped in growth?
Lloyd: I think that the collaboration business is at a turning point, it’s in transition. I was with Cisco when we started the world of IP telephony. Along that journey we became market leader. Then we led the transition and created a market for immersive video, which we call TelePresence. We made that market occur by demonstrating how the technology could apply to company processes. Then we hit a recession and people deployed the technology because they needed to save money. What’s happening now is I think the market’s moving away from taking advantage of those technologies only as endpoints. We’re seeing a lot more software coming into that environment, and the market is turning towards endpoints being any devices – my iPad, my Samsung Galaxy S3, my TV screen. So our model will turn more to software as well as increasing the number of endpoints and the cloud-based delivery of enterprise communications. The other transition is the cloud and people buying things as a service. As a result our gross numbers are down but in most of these categories our market share is up, which means the market’s kind of shifting. And with our market share position and the breadth of our portfolio we will power through that transition and I think come up with a much more integrated approach.

When do you expect that to happen?
I think it will take a couple of quarters. We are seeing increased demand for our cloud based unified communications portfolio. And naturally this then leads to more recurring revenue for Cisco — unlike selling equipment and phones it’s spread over time. This is actually part of our strategic plan, to build more recurring revenue.

MORE: Top 10 executive MBA programs
You’ve been pushing technology that allows employees to collaborate outside of the office, but some companies are trying to get them back into the office. Are you seeing similar efforts from you customers?
We’re not seeing that. When you really have to pull people together and you really have to transform a company that may be one tactic to doing it. At Cisco we bring all the leadership team together twice a year, but between those points we see them all the time — in virtual meetings, from iPads in airports. I can hold meetings from my home, which I do. Since I have a global job I can hold a meeting at 10 o’clock and still see my kids before they go to bed. The vast majority of our customers are looking to virtualize their real estate and are creating flexibility in their business model and looking at more global markets. You can’t do this any other way but by supporting a very virtualized work environment or you will drive people crazy. We all know what it’s like to fly to Bangalore. We’re in San Jose and if you took a knitting needle and stuck it straight through the world you would miss Bangalore by about 20 minutes. It’s a long trip.

Obviously you have to eat your own dog food but how do you make this part of the Cisco culture?
It’s top down, driven from [CEO] John Chambers. There were metrics put in place for parts of the company to make sure they were driving for these changes. When I was running worldwide sales at Cisco the first decision I made at the beginning of the recession was to cancel our big, annual global sales meeting which everybody loves and do a virtual meeting over TelePresence around the world, instead of all getting on a plane which at our scale costs a lot of money.

How did people react?
They didn’t like it. They missed their interaction with colleauges. But in the subsequent years they said in some ways it was better. They liked the ability to comment on a presenter’s presentation in real time and watch their colleagues dialogue in an online chat. You get a real-time interaction that you couldn’t achieve in a real room. There are examples across the board where we’ve used collaborative technologies in education, leadership, marketing and communications that have really set the bar. We have people join meetings anywhere in the world on a WebEx connection. And now my WebEx can join my TelePresence, and from my WebEx I can appear in a TelePresence conference, so it looks like you’re part of the same experience.

Source:http://tech.fortune.cnn.com/2013/03/28/how-cisco-learned-to-love-software/