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Thursday, February 14, 2013

Cisco Profits Rise 44%, Exceeding Expectations

Cisco Profits Rise 44%, Exceeding Expectations

SAN FRANCISCO â€" Cisco Systems is trying to pull off one of the toughest tricks in high technology, adapting a big legacy business to a vastly different future.

Cisco emerged from a pack of computer networking companies in the 1990s during the rise of the Internet and briefly became the most valuable company in the world. It still dominates the market for computer networking hardware, controlling 85 percent or more of some businesses.

Increasingly, however, customers want their technology suppliers to offer them sophisticated services, not just equipment, as they seek to better manage an Internet that connects not just computers, but also things like sensors and mobile devices.

Like other tech giants, including Microsoft and Dell, Cisco is struggling to adapt to this new world.

On Wednesday, the company reported fiscal second-quarter earnings that grew 44 percent. Although that was more than Wall Street expected, John Chambers, the chief executive, warned of “a challenging economic environment.”

Erik Suppiger, an analyst with JMP Securities in San Francisco, said Cisco “did a good job managing costs, and keeping their margins up, but there’s a lot of concern about what they can do to build revenue.”

“Building a cloud and wireless business eats into your traditional product lines,” he said. “If you have a wireless laptop, you don’t need a desktop computer connected to your office network.”

Mr. Chambers, who has led Cisco for 18 years, is well aware of that problem, and he has spent much of the last decade devising ways to adapt Cisco. In his latest reinvention, he has cut much of its consumer business, and has refocused on selling large, complex products and services for telecommunications firms, big business and governments.

Cisco’s latest ad campaign extols “the Internet of Everything,” in which even trees are connected to scientists, to solve global warming, and cars talk to traffic lights.

“We’ve broken away from the traditional players,” Mr. Chambers said in an interview after the results were announced. “The pipeline is starting to fill.”

There are indeed signs of progress, though it is unclear whether Cisco will prevail before Mr. Chambers retires in what he says will be two to four years. What may be his greatest task â€" building a software and services business distinct from its existing hardware business â€" is still in its early phase.

Cisco does appear to be garnering the sales and cash for such a move, however. As of Jan. 26, Cisco had a cash pile of over $46 billion, and some of the highest gross profit margins in high tech.

In the second quarter, Cisco, which is based in San Jose, Calif., had net income of $3.14 billion, or 59 cents a share compared with $2.18 billion, or 40 cents. Revenue rose 5 percent, to $12.18 billion. Excluding certain items, Cisco earned 51 cents. Analysts surveyed by Thomson Reuters had expected Cisco to make 48 cents a share, on revenue of $12.06 billion.

Despite the better-than-expected performance, Cisco shares retreated slightly in after-hours trading.

While sales in Europe were down 6 percent, Cisco’s sales grew in both Asia and the Americas. Newer businesses like video and cloud computing systems did well. Revenue from services, Mr. Chambers said, was now almost evenly divided between money from planning and installing traditional networks, and higher-value consulting contracts.

Mr. Chambers called video “the most intriguing area, not just because it will be 90 to 98 percent of the load” of data packets on the Internet. “It changes business, health care, government, everything.”

A version of this article appeared in print on February 14, 2013, on page B8 of the New York edition with the headline: Adapting to a New Tech Landscape Challenges Cisco.