Cisco Says the Recession Is (Mostly) Dead

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If you ask Cisco Systems (Nasdaq: CSCO) CEO John Chambers, this recession is over. Done. Finito.

... With a couple of caveats.

Cisco's first quarter of fiscal year 2010 was a beauty. It was the second consecutive quarter of sequential sales growth. Revenue was down 12.7% year over year at a cool $9 billion, while GAAP earnings per share shrunk from $0.37 to $0.30. The revenue figure came in "several hundred million" above the top end of management's guidance, and came with a side of stronger gross margins than expected.

Rather than letting this unexpected windfall trickle down to the bottom line, Cisco stepped on the gas pedal. Operating expenses landed at 41.7% of sales, far above the 38% to 39% range Chambers and company had been targeting, though pro forma operating expenses were only 37% of sales, a significant reduction from last quarter. Cisco launched two $3 billion buyout bids in the quarter along with heavy marketing. "We feel that making that investment in the second quarter, increasing our expenses, is going to pay back in the long term," said CFO Frank Calderoni. In other words, you gotta spend money to make money.

In general, Chambers agreed with positive comments from technology peers like IBM (NYSE: IBM), Texas Instruments (NYSE: TXN), and Intel (Nasdaq: INTC): Business is starting to feel like it used to in the good old days. Y'know, 2007 or so. In fact, Chambers says that the fourth quarter of 2009 was the "tipping point" of the recovery, and the bounce off the bottom happened the quarter before that.

Presented as evidence of the turnaround: American orders had been down about 30% year over year in recent quarters, but now sit just about flat with year-ago levels. Sequential metrics from product bookings and sales to gross margin growth and income totals are looking better than their average seasonal moves.

So we're mostly out of the woods, but don't turn off your flashlight just yet. "There are too many people I respect that aren't as optimistic as we are about the economy," Chambers said. "Things could happen on the political front that we all worry about that could cause us to misstep." Or in plain English, don't take out a second mortgage to invest in stocks today. Risk factors "out of Cisco's control" are still lurking around.

I still think Cisco was silly to start selling its own brand of server systems, though this week's partnership with EMC (NYSE: EMC) and VMware (NYSE: VMW) kinda-sorta explained the company's thinking. And as the unexpectedly strong sales here show, maybe I overestimated the damage a slighted IBM  would inflict.

Carry on, gentlemen. The proof is in the pudding, and this one tastes mighty rich.