Cisco struck an overwhelmingly positive tone in releasing fiscal second-quarter results, with CEO John Chambers making numerous comments to the effect that the firm has never been better positioned to capitalize on the opportunities ahead of it. Cisco's performance during the quarter was at the high end of management's forecast, with revenue up 7% year over year. The firm expects to continue growing in the third quarter, forecasting revenue up 3%-5% year over year. We don't expect to materially change our fair value estimate, and we continue to believe Cisco is executing well and its competitive position remains strong.
Cisco saw strength across several key markets during the second quarter, including switching (revenue up 11% year over year) and the data center segment (up 40%). Within switching, the Application Centric Infrastructure platform, Cisco's response to software-defined networking, continues to gain adoption, with ACI/Nexus 9000 customers reaching 1,700, roughly tripling over the past two quarters. The service provider market remains the biggest source of weakness, with service provider video sales down 19% year over year and routing sales up only 1%. However, service provider orders were down only 1% versus a year ago, the best result in six quarters. Emerging markets continue to show signs of stability, with orders up 1% year over year. Sales in China and Russia, as should be expected, are still very weak.
Efforts to streamline the company produced solid profitability during the quarter. The gross margin expanded slightly versus a year ago to 61.7%, while the operating margin expanded nearly a percentage point to 28.4%. Head count declined 3% during the quarter, bringing the total reduction to 5% since the end of fiscal 2014. Free cash flow was stable versus a year ago at $2.6 billion during the quarter despite a $1 billion unfavorable swing in working capital resulting primarily from the return to revenue growth.
Below is a 20Year FastGraph for CSCO:
Even at today's price of $29.40, I estimate fair value for CSCO to be around $35, so the stock is still a great value. I'll continue to hold.