Cisco Q2 beats cautious Street view

Wed Nov 9, 2011 7:47pm 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

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(Reuters) - Cisco Systems Inc forecast revenue and earnings above Wall Street expectations as demand from government and enterprises for its network equipment remained resilient despite global economic troubles.

Analysts had expected conservative quarterly guidance, given the economic uncertainty.

Chief Executive John Chambers said that budgets of large customers as well as governments were better than expected.

The world's biggest networking equipment maker projected a 7 to 8 percent rise in fiscal second-quarter sales, translating to $11.13 billion to $11.2 billion in revenue -- matching or slightly ahead of the $11.14 billion expected, on average.

Excluding items, Cisco predicted earnings per share of 42 to 44 cents in the quarter, beating the average forecast of 42 cents, signaling its months-long turnaround was bearing fruit.

But Chambers, who kicked off a months-long overhaul of the company to save $1 billion through layoffs and asset sales, warned that global uncertainty persists and it remains tough to predict market conditions.

"There will always be challenges," Chambers said. "We are watching very closely the developments in Europe and the global economy, public sector spending, India business, and the fallout from the flooding in Thailand."

Cisco competes with Juniper Networks Inc, Brocade Communications Inc, Alcatel-Lucent SA and Huawei Technologies Co Ltd, many of which have grabbed market share from the erstwhile high-growth Silicon Valley darling and chipped away at its margins.

Chambers vowed to make life difficult for rivals, in particular China-based Huawei. "In the past we have been a little too gentle," he said.

For the time being, unlike most of the competition, Cisco looks to be on track to revive growth and return to its old glory after it slashed its long-term targets and laid off thousands of employees.

Juniper Networks forecast disappointing fourth-quarter results, while Alcatel-Lucent scaled back its profitability goal for the year as telecom operators hold back spending in response to mounting economic uncertainty.

"The key takeaway is that Cisco executed well in a tough environment," Edward Jones analyst Bill Kreher said.

"Overall, the print looks clean with margin and operating profit upside relative to our estimates that are above the Street," Brian White of Ticonderoga Securities said.

Cisco beat its own margin expectations in the first quarter with non-GAAP gross margins at 62.4 percent, above its target of 61 to 61.5 percent.

"Gross margins appear to be stabilizing. We view that as an important step in the Cisco turnaround story," Kreher said.

Cisco's shares extended gains after Chambers' comments, rising 4 percent to $18.30 in extended trade, after closing down 3.8 percent.

On Wednesday, Cisco reported quarterly earnings per share that beat estimates, signaling that efforts to revive growth are beginning to pay off.

The company reported adjusted earnings of 43 cents per share for the fiscal first quarter ended October 29, compared with the average analyst forecast of 39 cents, according to Thomson Reuters I/B/E/S.

Revenue rose to $11.3 billion from $10.75 billion a year earlier, versus the average forecast of $11.03 billion.

"We weren't expecting fireworks for this quarter. I knew the company would control costs efficiently and there's a little bit of revenue upside," said BGC analyst Colin Gillis.

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