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Breaking ranks with its competitors, Juniper Networks (JNPR) and Brocade Communications (BRCD) Cisco Systems beat Wall Street expectations, beginning to turn the corner in a few areas:

1. Profit margins. A little bit of disappointment, especially on the product side. Overall margins dropped from 63.9 percent down to 62.7; product margins slid from 63.1 to 61.2 percent, while service margins increased from 67 percent to 68.6 percent.

The slide in product margins confirms that the company is facing increasing competition from high-end competitors like International Business Machines (IBM) Alcatel-Lucent (ALU), Hewlett-Packard (HPQ) and Juniper Networks; and low end completion from Chinese players like ZTE Corporation (Shenzhen- 000063) and Huawei Technologies Co.; and their bold strategy: Sell what Cisco sells at a deep discount and dispatch cheap labor for support. Nevertheless, the rise in the service margins confirms that the company is doing well in “bundling” traditional products that are increasingly turning into commodities with superior services.

2. The top line. Cisco’s top line was up 3 percent to $11.2 billion, exceeding analyst expectations — not bad for a mature $82 billion gorilla with 5.5 billion shares and tens of thousands of employees. The law of large numbers is, therefore, working against Cisco — though it didn’t work against Apple Inc. (AAPL). What was encouraging, however, was that revenue from new products increased by 7 percent — suggesting that Chambers “One Cisco” strategy works; the bottom line should include “a number of unusual items,” such as the recently announced layoffs.

3. Innovation. Cisco seems to be shifting from an external to an internal innovation model that is more sustainable. But Chambers didn’t give any details about this shift as there weren’t any questions on this issue,

4. Guidance. Though Mr. Chambers used the words “difficult” and “problematic” a few times, he avoided the use of worlds “challenging environment,” uncertainty,” “ unclear visibility, especially when it comes to one of the Cisco’s largest customer, the Federal and state government.

The bottom line: Cisco seems to have turned the corner on the top line and innovation; and the market seems to like itit is a trading buy.

Source: Cisco Is a Trading Buy