5 Things Cisco Systems Wants You to Know

By Timothy GreenFool.com

Cisco Systems reported solid fiscal first-quarter results earlier this month, beating analyst estimates for both revenue and earnings. The core switching business grew by 5% year over year, while smaller segments, like collaboration and data center, posted double-digit growth. These revenue gains helped drive a 9.3% rise in non-GAAP EPS, well ahead of expectations.

Beyond the numbers, Cisco's conference call contained plenty of useful information for investors. Here are five things that Cisco's management wants investors to know.

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Driving innovationThe IT market has gone through quite a few changes, driven by the growth of cloud computing, and all established tech companies risk being out-innovated by smaller, nimbler competitors. Under CEO Chuck Robbins, who took the helm of the company in July, Cisco has put a renewed focus on innovation.

In recent years, large companies have been trying to capture the speed and innovation that start-ups are known for by creating internal teams that essentially operate as start-ups. Cisco is one of these companies, and Robbins pointed to this strategy as one way that Cisco is bringing products to market more quickly.

For decades, Cisco has used a strategy known as "spin-ins," where the company is the sole investor in an external start-up founded by its own employees, with Cisco eventually buying that start-up, thus rewarding the employees. Robbins is moving away from spin-ins, instead building internal teams that aim to capture the same characteristics of a start-up. So far, this new strategy seems to be working.

Acquisitions and partnershipsCisco has always been fairly acquisitive, snapping up smaller companies in order to build out its product and service portfolio. This strategy continues under Robbins, in addition to entering into some major partnerships:

Cisco has made quite a few acquisitions in the security space over the past few years, and during the quarter, the company announced two more -- Portcullis and Lancope -- in addition to closing its previously announced acquisition of OpenDNS. Cisco also announced a couple of significant partnerships. In August, Cisco partnered with Apple to optimize its networking hardware for the iPhone and iPad, and earlier this month, Cisco and Ericsson teamed up in a deep partnership that promises an incremental revenue opportunity of $1 billion or more by 2018.

Cloud growthWhile the growth of cloud computing, particularly public clouds, is viewed as a threat to Cisco, the company's focus on private clouds is paying off:

Cisco has become one of the top server vendors in the world with its UCS line of servers, tied for fourth globally during the second quarter of 2015. The data-center segment is still a small part of Cisco, accounting for a little less than 7% of revenue during the latest quarter; but it's the faster-growing segment, and there's plenty of room to continue to win market share.

Cisco's latest line of switches, which support Application Centric Infrastructure, Cisco's take on software-defined networking, is also growing fast. ACI has some major competitors, including NSX from VMWare;but even in cases where an alternative is used, many clients are running the software on top of Cisco's hardware. The networking needs of Cisco's clients are changing, but Cisco has taken steps to ensure that it remains the overwhelming market leader.

Cisco, the software companyCisco is mainly known for its networking hardware, but software is becoming more important for the company:

Cisco is shifting toward being a provider of solutions, not just hardware, and the company expects software to be a key driver of its growth going forward. During the next three to five years, the company expects software revenue to grow by 10%-15% annually, and by 2020, software could account for more than one-quarter of Cisco's total revenue.

Software generally carries higher margins than hardware, and this shift could lead to Cisco becoming more profitable over time.

Emerging markets are coming back to lifeOne of Cisco's major challenges during the past couple of years has been weak sales in emerging markets. During the first quarter of the previous fiscal year, sales in emerging markets slumped 6% year over year, with sales in the APJC region declining by 12%, and sales in the BRICS plus Mexico region also falling 12%. In the first quarter of this year, the situation improved dramatically:

Unfortunately, Cisco's guidance for the second quarter was weaker than expected, with the company calling for revenue growth of just 0%-2%, citing an uncertain macroeconomic environment. This strong growth in emerging markets may not continue into the second quarter.

The article 5 Things Cisco Systems Wants You to Know originally appeared on Fool.com.

Timothy Green owns shares of Cisco Systems. The Motley Fool owns shares of and recommends Apple. The Motley Fool recommends Cisco Systems and VMware. 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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