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Telecom equipment bellwether and Dow-30 component Cisco Systems (CSCO - Free Cisco Stock Report) has reported better-than-expected top- and bottom-line results in the fiscal third quarter (ended April 26, 2014). Non-GAAP earnings per share of $0.51 matched the year-earlier figure and beat Wall Street's estimate by $0.03. Revenues, at $11.5 billion, marked a 5% decline year over year, but nicely exceeded company guidance. Product sales fell 8% while service revenues rose 3%. The highly scrutinized product gross margin came in at 61.4% (within guidance), as lower pricing was offset by cost deleveraging stemming from higher revenues. Cisco shares traded notably higher on the news, in a sharply lower stock market.

Challenges on the mobility side of the router business led to a 10% decrease in routing revenues. The company refreshed the product line a few quarters back, but is still competing with more-established, lower-cost devices. Fortunately, orders picked up in the first quarter, with flattish comps year over year. Management cautioned that the technology transition is still under way, and router sales should continue to be lumpy in the periods ahead. Importantly, it usually takes one to two quarters for orders to have an effect on the income statement.

Similar to the new Routing technology, Cisco has recently rolled out new Switching gear. The unit saw sales fall 6%, and management anticipates several more quarters before Cisco experiences growth in overall switching. The Nexus 9000 has been a bright spot, with the number of large customers rising from 20 last quarter to 175 in the latest period.

Elsewhere, data center revenues were up 29%, thanks to growing adoption of the Unified Computing System platform for hybrid cloud environments, big data applications, and virtual desktop services. The unit boosted market share for the 17th consecutive quarter, as the one-stop-shopping experience appears to be resonating with customers.

Collaboration revenues fell 12%, but orders increased 4%, reversing a multi-quarter negative trend. WebEx was positive, while the Unified Communications and TelePresence product lines experienced declines.

Revenues in the Wireless segment were up 3% and orders advanced 12%, as weakness in service provider demand and low-end devices was offset by solid progress with next-generation Wi-Fi systems (802.11ac).

Companywide, orders were relatively flat year over year, but encouragingly the book-to-bill ratio was above 1.0. Orders from U.S. commercial and enterprise customers were both up over 10%, owing to an increase in large deals. Cisco's business across the Atlantic appears to be stabilizing, with orders in the U.K., Germany, and northern Europe up 7%, 5%, and 4%, respectively.

However, emerging markets remain a problem area. Orders from Brazil and Russia fell 27% and 28%, respectively. Together, BRIC countries plus Mexico declined 13%, and the weakness is being felt across the industry. Management reiterated its commitment to emerging markets, but expects the challenging environment to continue for the foreseeable future.

Demand from service providers has also been a sore spot for Cisco, though showing signs of recovery. Orders from these customers fell 5% during the April term, an improvement from declines of 12% and 13%, respectively, in the October and January periods. The company does not expect growth to return for several quarters yet.

Management is calling for fiscal fourth-quarter revenues to decline 1%-3% year over year, but the measure should increase 4%-6% on a sequential basis, which is better than normal seasonally. Share net is expected between $0.51 and $0.53, which would allow full-year earnings to come in toward the high end of the $1.95-$2.05 guidance range.

Cisco Systems appears to be making progress in its turnaround efforts. Although there is still work to be done, we are encouraged with the company's most recent quarter and continue to recommend the stock for conservative, long-term investors.

About The Company:Cisco Systems Incorporated is a leading supplier of high performance internetworking products for linking local-area and wide-area networks of computer systems. Products include routers, LAN and ATM switches, dial-up access servers, and network management software. The Cisco IOS software platform ties these products together, delivers network services, and enables networked applications.

At the time of this article’s writing, the author did not have positions in any of the companies mentioned.