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In John Chambers' Final Quarter, Cisco Results Beat the Street Slightly

Over 20 years at Cisco's helm, he did it his way.

Asa Mathat

Networking giant Cisco Systems on Wednesday reported a slight beat on its bottom line versus the Street expectations for its fiscal third quarter.

Cisco posted per-share earnings of 54 cents, up 6 percent, on revenue of $12.14 billion, up 5 percent. The results were better than what analysts surveyed by Thomson Reuters had expected: Earnings of 53 cents a share on revenue of $12.07 billion. Cisco shares fell by less than 1 percent in after-hours trading.

Revenue growth was led by sales of products, which rose by nearly 6 percent. Services revenue rose 3 percent. Gross margins, a key measure of profitability, rose to 62 percent from 60 percent a year ago, a surprise given the strong U.S. dollar relative to international currencies.

Cisco said it expects revenue to rise between 1 percent and 3 percent and to post a per-share profit of between 55 and 57 cents, straddling the Street consensus view of 56 cents. It said it expects a gross margin of between 61 percent and 62 percent.

“Our vision and strategy are working and we are executing very well in a tough environment, as evidenced in our revenue growth, profitability, strong gross margins and cash generation,” CEO John Chambers said in a statement. The quarterly report is his last as the company’s CEO, as he will hand over the reins to successor Chuck Robbins in July.

On a conference call, Chambers took the unusual step of slapping down rumors about a possible acquisition of the security company FireEye, reports that goosed that company’s shares by more than 4 percent. Chambers said, “We don’t comment on M&A rumors, but I wouldn’t bet on the one you heard about today.” FireEye shares fell 3 percent after hours.

Chambers, in an interview, said the company was in about as good a set of circumstances as he could have hoped to leave it. “I said three years ago I wanted to get the company through the next two to four years. It turned out three years was just right,” he said. “I also wanted to get us to the point where the momentum of the business was going up and looking better.”

Chambers will remain as executive chairman, but describes his role as being “Chuck’s wingman.” He likened the arrangement to when Brian Krzanich took over as CEO of Intel in 2013 and relied somewhat on the counsel of Chairman and former CFO Andy Bryant.

Cisco sales rose by 2 percent in the Americas and European regions and by 1 percent in Asia. Sales to enterprises rose 7 percent. Sales to government agencies rose 7 percent. Sales to commercial customers rose 6 percent. Sales to service providers, a key market that has been weak recently, fell 6 percent year-on-year.

Within the U.S., Cisco said, sales to the federal government rose 24 percent, and by 10 percent to state and local governments. Among its emerging countries, it said sales in Mexico rose 53 percent, and by 6 percent in India.

Revenue from sales of switching products, Cisco’s biggest business, rose 6 percent to $3.6 billion. The switching business was led by sales of the Nexus 3000 and 9000 products, which rose 144 percent year-on-year.

Router sales rose 4 percent to $2 billion. Sales into data centers rose 21 percent to $801 million, led primarily by Cisco’s Unified Computing Systems. Cisco said that product line is on track to do $3 billion in revenue this year.

Security revenue rose 14 percent to $412 million. Revenue from video sold to services providers — mostly cable TV companies — fell 5 percent to $914 million.

Deferred revenue, the portion of Cisco’s business that is delivered as a service, rose to $14 billion, up from $13.2 billion a year ago, an increase of 8 percent. CFO Kelly Kramer said different parts of Cisco’s business fall into that revenue line. Most of the deferred revenue — more than $9.2 billion — is coming from services like WebEx, Cisco’s Web-based meeting services and the software portion of its Meraki wireless networking products.

Cisco ended the quarter with a headcount of 70,112, down from 73,834 a year ago. The company announced a restructuring that included some 6,000 job cuts, but also included some hiring in other business areas.

And so this is where, as part of a recurring tradition between Chambers and me, I pick a song to describe the quarter. The choice is pretty easy. Frank Sinatra’s “My Way” serves as a pretty accurate tribute to Chambers as he exits the stage as CEO after more than 20 years at Cisco’s helm.

I went back and looked at Cisco’s 10-K filing with the U.S. Securities and Exchange Commission from 1995, his first year on the job: At that time Cisco hadn’t yet broken $2 billion in annual revenue, and employed 4,086 people. The analysts expect it will approach $49 billion when the current fiscal year closes in July. In 1995 Cisco had less than $290 million in cash on its balance sheet. Today it has more than $54 billion. It’s hard to argue that Chambers hasn’t had a hell of a run.

So, here’s Sinatra.

This article originally appeared on Recode.net.

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