Cisco trounces estimates, sees strong recovery

NEW YORK Wed Feb 3, 2010 8:26pm EST

A pedestrian walks past the Cisco logo at the technology company's campus in San Jose, California February 3, 2010. REUTERS/Robert Galbraith

A pedestrian walks past the Cisco logo at the technology company's campus in San Jose, California February 3, 2010.

Credit: Reuters/Robert Galbraith

NEW YORK (Reuters) - Cisco Systems Inc's quarterly results and outlook exceeded Wall Street expectations as more customers upgraded their networks to handle growing Internet traffic, leading CEO John Chambers to declare a very strong recovery.

Shares in the leading network equipment maker rose 4 percent as the company forecast revenue growth of 23 percent to 26 percent in the current quarter, far exceeding the average analyst forecast for a rise of 16.5 percent.

"We're hitting on all cylinders," Chambers told analysts on a conference call, citing a "dramatic across-the-board acceleration" in the business.

"We saw very strong, balanced growth from a year-over-year perspective in almost all of the major geographies and market segment categories," he said.

He sounded a bullish note for the rest of the technology industry, predicting a good chance of "solid, sustainable economic growth."

Cisco is one of the first major technology companies to report results that include much of January 2010. Its performance and outlook are an indicator for the rest of the technology sector, especially in business spending.

"Their guidance suggests they are feeling very good," said Erik Suppiger, an analyst at Signal Hill Group. "It was very encouraging."

Chambers also said he expects to hire 2,000 to 3,000 people in the next few quarters, adding to its headcount of over 65,800, showing Cisco has emerged from a cost-cutting phase.

RETURN TO GROWTH

Revenue for Cisco's fiscal second quarter ended January 23 rose 8 percent to $9.8 billion, marking the first year-on-year growth since the quarter ended October 2008. Analysts, on average, had expected $9.4 billion, according to Thomson Reuters I/B/E/S.

Net profit rose to $1.9 billion, or 32 cents a share, from $1.5 billion, or 26 cents a share, in the year-ago quarter. Earnings excluding special items rose to 40 cents from 32 cents, beating Wall Street's average forecast of 35 cents.

"It looks like they beat across the board, both their high end of guidance, but also some of the more aggressive whispers," said Mark McKechnie, analyst at Broadpoint Amtech.

The results come a year after Cisco reported disappointing revenue and job cuts, stoking fears of a 2001-style freeze in technology spending. Yet results in the past few quarters have shown cutbacks were not so drastic, as companies were not as over-invested in network equipment as they were a decade ago.

Encouraged both by a stabilizing economy and the popularity of smartphones like Apple Inc's iPhone, Cisco's customers have begun buying more routers, switches and other equipment that support wireless and Internet use.

Cisco said revenue last quarter grew 12 percent in the U.S. and Canada, and 16 percent in Asia Pacific. Sales fell 3 percent in Europe, but Chambers said the overall improvement was balanced enough to suggest a sustainable recovery ahead.

Cisco shares rose to $24.03 in extended trading, after ending 0.2 percent higher at $23.07 on Nasdaq.

LONG-TERM GROWTH

Chambers also reiterated his long-term revenue growth target of 12 percent to 17 percent, and said the company would continue investing to expand the business.

Acquisitions and investments in new technologies have helped turn 25-year-old Cisco into the world's biggest network equipment maker with annual revenue in excess of $35 billion. When Chambers became CEO in 1995, revenue was only around $1 billion.

Despite the upbeat outlook, however, some analysts cited concerns such as growing competition with Hewlett-Packard Co, International Business Machines Corp and China's Huawei Technologies Co.

Cisco has recently encroached on HP and IBM's turf by selling software, data center servers and a wider range of technology services. Those companies have in turn retaliated by forging sales partnerships with other network equipment makers. HP is set to buy Cisco's smaller rival 3Com.

Chambers said he was not seeing any impact of the growing rivalry with HP and IBM, but he noted some pricing pressure in China -- a market Cisco sees as a key growth area.

"Cisco's looking to grow in more markets than ever before. Their competitive positioning is strong. But at the same they will have more intense competition," said Frost & Sullivan analyst Ronald Gruia.

(Reporting by Ritsuko Ando; Additional reporting by Sue Zeidler and Ian Sherr; Editing by Richard Chang, Tiffany Wu, Phil Berlowitz)

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