Cisco Systems Earnings Call Nuggets: Carrier Side Analysis and Service Providers

On Wednesday, Cisco Systems Inc. (NASDAQ:CSCO) reported its second quarter earnings and discussed the following topics in its earning conference call. Take a look.

Carrier Side

Simona Jankowski – Goldman Sachs asked: I have a follow-up on the carrier side in routing. I think you talked about some uncertainty in carrier topics that is influencing your guidance, yet your own service provider bookings were quite strong at 12 percent. Your peers as you pointed out, have had a very difficult period.

Can you just give us a bit more color on what you are seeing in the carrier spending environment and any standout areas of strength or weakness? Specific to your own routing business as you pointed out, your major competitor had a significant decline. Do you think that difference in performance is driven primarily by the timing of your respective product cycles or are there any specific major customer opportunities, where you think you’ve actually displaced your competitor?

John T. Chambers – Chairman and CEO responded: The 12 percent was revenue growth, not orders, and if you look at where we’re going in the service provider, we are becoming in the sweet spot. It doesn’t matter if you’re talking to Time Warner (NYSE:TWC), Verizon (NYSE:VZ) and AT&T (NYSE:T), Sprint (NYSE:S), Deutsche Telekom (NYSE:DTE), British Telecom, Telefonica (NYSE:TEF), NTT (NYSE:NTT), China Mobile (NYSE:CHL), Telstra (TLS)–all of which we have in the last month at multiple levels.

Our role in terms of what they’re trying to accomplish is changing. In our opinion, some owners are pretty good at verifying this, getting a much larger share of their spend. In terms of our ability to provide value way beyond (quoted) router back to the earlier question that was asked.

They don’t buy routing. They buy an architectural play from data center all the way out and repeating the Korean Telecom and what Chairman Lee did there.

He is aligned with us all the way from the data center, all the way to the smart services that his company delivered across 16 countries. Our role in service providers as they focus on the key elements mobility, mobility, the second key element video, both for entertainment video and business video.

The third key element,cloud, delivers new services and opens up new revenue opportunities for us. And our Fourth key element, is how you dramatically cut costs in this environment and how you balance within it.

We are getting a pretty clear lineup in terms of how we play in these categories.

Service Providers

Mark Sue – RBC Capital Markets asked: I had a question on the service providers. If we look longer term, there is an increasing inclination by carriers to reduce their CapEx as a percentage of their revenues. It’s also happening at a time when they’re also seeing their margins decline.

I guess for Cisco longer term to grow their service provider revenues, you have to gain more share of a shrinking wallet. Does that mean structurally, there is a ceiling on margins as you push your architectural approach or does the dialogue suggest your customers that they actually will pay more since they get more?

John T. Chambers – Chairman and CEO responded: Most service providers will absolutely pay more if they get more. Their problem is very simple as you articulate it very well.

Their capital spend was going here in the U.S. as an example for cellular service providers at twice the rate the revenues were and the profitability in the revenues was sliding; this is where you see them get excited about what they can do in cloud in delivering services.

This is where you see them getting excited about new mobile capability.

This is where you get and see them excited, moving the video into home, which is why we must be in that set top box business going to a hybrid type approach going clearly to the cloud and the data center.

This is where I think you see perhaps more than any other time,

Mark, why we had to play across architectures, which we clearly bet on a decade ago. While we are getting better at operations, (have been getting the better) efficiencies and these are doing business. These are best and good execution we’ve done over a period of time.

Nick Adamo and Pankaj have joined the HIPS on this, along with Sameer from the services side on it. So, I think we have share of wallet opportunities in front of us that we’ll continue to weigh more than a couple of years,

But secondly for any CEO, you turn to him and say I can bring you a certain amount of revenue and I can increase your profits. If they believe you can do that and you show it a step at a time, then it’s a very good model; it plays right into our sweet spot.

We don’t compete against them like several of our large data center peers. This is a market that we do not compete against them. We enable them as we move forward.

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