Shares of Cisco Systems, Inc. (NASDAQ:CSCO) had an allergic reaction to last night’s second-quarter report. Both sales and earnings largely met analyst expectations and guidance for the next quarter fell right in line with Street views, but the stock dipped as low as 2% in after-hours action.
Not to worry, though. Cisco shareholders enjoyed a market-beating 25% gain over the last quarter, so nobody walks off to the poorhouse this time. Chalk this drop up to mildly overheated expectations.
Cisco’s larger strategy should weigh far more heavily in your investment decisions than a nickel of earnings here, a percent of sales growth there. And on that front, we got the most enlightening report in ages.
I was a critic of Cisco’s decision to sell server systems for years. The so-called unified computing systems, or UCS, product line drove a wedge between Cisco and several longtime partners. The company moved from being a trusted networking ally for International Business Machines Corp. (NYSE:IBM) and Hewlett-Packard Company (NYSE:HPQ) to a direct competitor across the data center. Big Blue quickly shifted its networking orders to Cisco’s traditional rivals. HP went the extra mile and bought networking vendor 3Com as its contracts with Cisco expired. We ain’t friends no more, buddy.
It took almost four years, but the gamble is starting to pay dividends.
UCS systems have moved from the ignominious “other” segment to the prestigious data center division, where the product line’s 87% year-over-year sales growth generated about $500 million of revenue this quarter. That’s not chicken scratch anymore.
CEO John Chambers gushed about the opportunity his UCS baby unlocked: “CIOs continue to tell us that UCS and Nexus are their primary strategy in the data center, and they are increasingly evolving Cisco from a primarily a communications partner to a strategic IT partner.”
Moreover, the systems are often sold as a package with high-margin Nexus switches. The combination should do wonders for Cisco’s margins as the UCS business scales up. The Nexus-UCS combo is sold as a premium package. “Most of our peers, when they install servers, they’re selling commodity products,” Chambers said. “We’re not selling commodity products. We get premiums, we get architectures, we’re getting standardized on.”
This used to be IBM’s selling spiel, not Cisco’s. Chambers traded in partnerships for larger stature in the IT industry, and it wasn’t as insane as I used to think — in the very long run.
The article Cisco’s Crazy Gamble Is Paying Off — 4 Years Later originally appeared on Fool.com and is written by Anders Bylund.
Fool contributor Anders Bylund holds no position in any company mentioned. Check out Anders’ bio and holdings or follow him on Twitter and Google+. The Motley Fool owns shares of Cisco Systems and IBM. Motley Fool newsletter services recommend Cisco Systems.
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