Cisco's Service Provider Video Sales Rebound

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Cisco Systems' cable-focused service provider video unit bounced back in the quarter ended Jan. 28 with sales up 23% -- one year after the company reported a steep drop in set-top sales -- reaching $1 billion for the period.

The company is seeing "pervasive video growth" occurring in the market, Cisco chairman and CEO John Chambers said on the company's earnings call Wednesday. Cisco's emerging video technologies sales grew 59% in the quarter, and "gross margins have improved dramatically by over 20% in the last year," he said.

The growth comes after Cisco's cable set-top sales plunged 29% year over year for the three months ended Jan. 29, 2011. The set-top business fell to an annualized run rate of approximately $1.6 billion -- down from about $2 billion three months earlier -- according to the company.

Cisco remains "very much committed" to the set-top box market, Chambers said on the call Wednesday, a point he has made the last several quarters as the company sold off its set-top manufacturing facility to Foxconn. "Our service providers customers asked us to partner with them as they move from the traditional set-top boxes to IP set-top boxes to the cloud in our Videoscape solution," he said.

Over all, Cisco's service provider segment grew product orders 12% for the quarter -- the highest out of all its customer segments. Enterprise grew 7%, commercial grew 7% and public sector was down 1% year-over-year. "Our performance in the service provider market this quarter is proof of the power of our integrated architectural approach, and the benefits of our intelligent network in helping our customers to transform their business and capitalize on new revenue opportunities," Chambers said in his prepared remarks.

Last fall Cisco named Jesper Andersen senior vice president and general manager of the Service Provider Video Technology Group. He replaced Enrique Rodriguez, a former Microsoft exec who left Cisco after about a year.

The strength in Cisco's Service Provider segment, which accounts for approximately 33% of overall sales, left Jefferies & Co. analyst George Notter "positively surprised."

"The Service Provider numbers ran contrary to recent company commentary across the space," he wrote in a research note, adding that "a good chunk of the carrier strength" came from Cisco's Service Provider Video Technology Group.

Morgan Keegan & Co. analyst Simon Leopold said in a note that while lower overall levels of service provider spending in the near term remain a concern for Cisco, "we envision service providers investing in concentrated areas which generate tangible profitability over the longer term such as hybrid IP set-tops to offer expanded services."

In the period, which was Cisco's second quarter of fiscal 2012, the company reported total sales of $11.5 billion (up 10.8%) and net income of $2.2 billion (up 43.5%). Cisco achieved $1 billion in cost reductions during the period, one quarter earlier than expected, Chambers said.

In the quarter, Cisco completed its $99 million acquisition of privately held BNI Video, which developed a Web-based video back-office and a system for content delivery network analytics. The startup's investors included Comcast and Time Warner Cable.

Cisco last month announced new components of its Videoscape portfolio to provide "cloud-based" services. Those include Voyager Vantage, software that connects set-tops to the cloud for deploying user interfaces and interactive program guides as well as extend VOD services and integrate new Internet-centric applications, which Cisco licensed from ActiveVideo Networks.

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