Networking equipment bellwether and Dow-30 component Cisco Systems (CSCO - Free Cisco Stock Report) has reported fiscal second-quarter (ended January 26th) results that were mostly in line with our estimates. While year-over-year revenue growth of 5% matched our expectation, non-GAAP earnings per share of $0.51 (includes a $0.01 tax benefit) came in 4% above our call, 6% higher than Wall Street's consensus estimate, and 9% above the year-earlier tally. Moreover, the company turned in a solid performance despite a still-challenging global operating environment. Nevertheless, the stock traded down modestly following the announcement.

Taking a closer look at the top-line advance, overall product sales were up 3% year over year, while the Services unit continued its stellar performance by posting 10% higher sales, thanks to its ability to save customers money on operating costs. Indeed, that unit reported an 81% increase in new customers for the quarter.

The core Switching unit logged 3% revenue growth, which was a little better than expected, with rising demand for data center switches (Nexus 2000, 5000, and 7000) offsetting so-so sales of more-traditional devices. However, management expects the segment to report flat results for the year, due partly to low visibility from Switching's most significant customer, the U.S. government. We think management's commentary will turn more positive if the employment picture improves and private enterprise becomes less cautious.

Elsewhere, router sales fell 6% year over year, which was steeper than the 2% decline in the October quarter. The primary culprit appears to be the timing of some large deals, as well as weakness in Europe and China.

Sales at Cisco's fastest-growing segment, Wireless, were up 27%, resulting in the fifth-consecutive quarter of record top-line growth. Data center revenues expanded 65%, led by Cisco's Unified Computing System. Those products, along with the Nexus line of switches, have achieved a $3.5 billion annual run rate, or approximately 7% of our full-year 2013 revenue estimate.

Meantime, sales of collaboration products continued to dwindle, as a strong WebEx performance was more than offset by poor telepresence volumes. The weaker videoconferencing results largely stemmed from a pullback in spending by the U.S. government.

The global revenue breakdown was mixed. Asia and the Americas were up 8% and 9%, respectively. But revenues from the segment comprised of Europe, the Middle East, and Africa fell 5%. Southern Europe continues to be a drag on the latter, a trend we do not anticipate will reverse soon.

The gross margin performance was consistent with prior results, thanks to ''value engineering'' and efforts to manage the product mix. The order book was not particularly impressive at first blush, as companywide orders were flat year over year. However, Cisco did face a difficult comparison, since orders in last year's fiscal second quarter jumped 17%. Business in the Americas expanded 2%, with customer orders in the enterprise, commercial, and state and local government channels each rising at a high single-digit rate. Federal bookings dropped 5%, acting as a partial offset.

In Asia, orders increased 3%, owing to higher demand in Japan and India (up a combined 50%). Still, orders generated in China slipped 4% from the year-earlier period, which we attribute to price competition from Chinese electronics giant Huawei. Weak demand in that nation may linger for several quarters, but Cisco nevertheless reinforced its commitment to expanding market share in the region. Orders across Europe dropped 6%, a modest improvement from the prior quarter when demand declined by 10%.

Cisco also provided some color on its service provider customers. That client base is waiting to see how changes in the economic and political landscape may affect business, though the sector appears cautiously optimistic about increasing capital budgets year over year, particularly for mobile phone infrastructure. Cisco does not compete in the base station space, but has good exposure to wireless LAN, edge routers, mobile backhaul, small cells, and SP Wi-Fi.

The company expects fiscal third-quarter revenues to rise 4%-6%, gross margins to remain in the 61% to 62% range, and non-GAAP earnings per share to be in the $0.48 to $0.50 range. Our estimates are in line with Cisco's expectations. The outlook assumes solid sales to U.S. commercial and enterprise customers, stabilization in the European marketplace, and reacceleration in emerging market growth.

Overall, we think this was a solid earnings release, considering the global macroeconomic environment remains less than ideal. Cisco has positioned itself well to take advantage of growth sectors, namely mobile, video, and data centers. The stock is well suited to conservative, income-minded accounts, owing to the issue's stellar Safety rank (1: Highest), the company's rock-solid Financial Strength rating (A++), and the above-average dividend yield. Investors seeking price appreciation potential may want to wait for more evidence of improving conditions before making a commitment here.

About The Company:Cisco Systems Incorporated is a leading provider of Internet Protocol-based networking and other products for transporting data, voice, and video across geographically dispersed local-area networks, metropolitan-area networks, and wide-area networks. Devices are primarily integrated by Cisco IOS Software and include Routers, Switches, New Products, and Other. Provides services associated with these products. Foreign business accounted for 42.4% of fiscal 2012 revenues. R&D, 11.9% of revenues.

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