5 Things Cisco Systems, Inc's Management Wants You to Know

By Anders BylundFool.com

Image source: Cisco Systems.

Cisco Systems delivered a modest earnings surprise for its fiscal third quarter, but left investors guessing the reasons behind that result. Luckily -- and as expected, of course -- Cisco's management followed up that tight-lipped report with a conference call.

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That's where the company shared real detail on the business, including fresh guidance for the fourth quarter. And if that weren't enough, a Cisco executive then hit the stage at an industry conference just five days later, spilling even more beans on the minty-fresh quarterly results.

Here's a rundown of the five most interesting things that were said in these two events. By putting the quotes into context, I'll help you figure out what Cisco's leaders were talking about.

Image source: Cable Confusion by Eric, on Flickr.Cisco delivered 5% year-over-year sales growth in the third quarter alongside 6% higher adjusted earnings.

How the third quarter worked outCisco delivered 5% year-over-year sales growth in the third quarter alongside 6% higher adjusted earnings. That much was known from the quarterly report, but Cisco held back on additional detail.

Here's how John Chambers -- Cisco CEO since 1995, but set to step down on July 26 as veteran insider Chuck Robbins takes his title -- described the driving forces behind this quarter in the conference call:

To recap, Cisco is humming on almost every cylinder. There's strong growth in three out of four domestic product categories, with service provider sales being the obvious exception. Later in the call, Chambers clarified that the service provider category's sales were down 17% year over year, but if you back out the contribution from a single large telecom customer, it would be just a 6% decline.

In yet another section, Chambers lingered over a large and unusual order for optical networking systems from Verizon , so it's almost a given that the sudden ordering slowdown in this sector rests on AT&T .

That makes sense, of course, since AT&T CEO Randall Stephenson very publicly believes that it's impossible to invest in communications infrastructure right now. He's walking the talk, too. AT&T's trailing capital expenses have fallen 16% during the last two quarters, as regulators slapped a Title II label on broadband operations.

That's one reason why Cisco's quarter could have been much better.

T Capital Expenditures (TTM) data by YCharts.

More service provider detailChambers had to explain the service provider situation even further. Cisco has been battling this slowdown for some time, and the company is taking steps to limit the damage:

Whoa, Nellie. That's a lot of excitement, particularly since that portion started out by explaining how Cisco is tackling a serious problem.

In short, the company has revamped its entire sales and support structure for the service provider market, and already recorded at least one major win as a result. Freshly anointed CEO Chuck Robbins already played a major role in this restructuring, giving him an early taste of really running the company.

Later on, Chambers made it clear that he will let Robbins hold the wheel and work the pedals. Sure, Chambers stays on as executive chairman, but promises not to become a puppet master. "Chuck is the CEO -- period," he said. "I will be his wingman."

Chambers compared this budding relationship to the way Intel CEO Brian Krzanich sometimes reaches out to chairman (and industry legend) Andy Grove for strategic support. Robbins even paid a visit to Intel, to see how Krzanich manages his relationship with Grove.

So you should expect a similar situation for Cisco. Will it lead to the fantastic growth that Chambers envisioned in this tiny rant? Hard to tell, but at least there's some logic to back up the emotion here.

Security concerns Here's another potential growth driver for Cisco. At that second conference, Chris Dedicoat painted an attractive picture of the security solutions market. As president of Cisco's EMEAR segment -- Europe, the Middle East, Africa, and Russia -- he comes in from an international angle. His comments carry value in every market, though:

Those are scary statistics for anyone with a role in network security and operations. Every single enterprise customer has turned up malware infections in Cisco's studies, and they often don't even know about it.

Cisco can offer security solutions in and around corporate networks, starting with attack shields in the so-called edge routers. In the earnings call, Chambers noted that Cisco is the largest provider of these edge security solutions, but with just a 7% market share in a brutally fragmented market. The company hopes to capture a 40% share over time, but it will be a difficult multiyear slog.

Fourth-quarter guidance Looking ahead, CFO Kelly Kramer during the conference call provided sales and earnings guidance right in line with analyst expectations at the time:

To recap, these guidance ranges center on adjusted earnings of $0.56 per share and sales near $12.6 billion. Both figures were exactly in line with prevailing estimates.

In other words, those dramatic growth drivers that Chambers talked about will have to wait a while. Rome wasn't built in a day, right? Neither was San Francisco.

Cisco CEO John Chambers. Image source: Cisco.

Cisco's competitive advantages On that note, here's how Chambers sees Cisco beating the competition over the next few years. Spoiler alert: Quality beats discount pricing:

If you think you've seen this idea before, you're probably reminded of the old IBM model.

Even as IBM is moving away from its iconic one-stop-shopping model, Cisco steps in to take it over. There was a time when every tech giant seemed hellbent on copying the IBM idea, but they've been dropping like flies. IBM itself is becoming more of a pure play on software and services, Hewlett-Packard is about to split in two and redefine its entire business model. Cisco is the most credible "IBM 2.0" alternative left standing, though Oracle hasn't entirely given up the fight.

Cisco's big idea is that this is where you go when you need one vendor to create a data center -- integrated from end to end. I'm not entirely sure that customers will buy that logic, at least not on the scale that Chambers envisions. Single-source solutions can be powerful and convenient, but you can say the same about picking best-of-breed products for every piece of the puzzle.

So the jury is still out on Cisco's grand vision. The company still gets credit for having that big dream... and an outside shot at achieving it.

The article 5 Things Cisco Systems, Inc's Management Wants You to Know originally appeared on Fool.com.

Anders Bylund owns shares of Intel and International Business Machines. The Motley Fool recommends Cisco Systems, Intel, and Verizon Communications. The Motley Fool owns shares of International Business Machines and Oracle. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.

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