Cisco still pessimistic on Europe, raises dividend

Thu Aug 16, 2012 7:24am EDT

The Cisco logo is displayed at the technology company's campus in San Jose, California February 3, 2010. REUTERS/Robert Galbraith

The Cisco logo is displayed 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 (CSCO.O) offered little hope that dire economic conditions in Europe would come to an end any time soon but pleased investors with a 75 percent dividend hike as the company posted quarterly results that beat estimates.

The world's largest network equipment maker had spooked investors three months ago, when Chief Executive John Chambers cautioned that macroeconomic conditions in Europe could hurt technology spending but now analysts expect Chambers to remain cautious.

Chambers said on a call with analysts that Europe would stay challenging over the next several quarters.

"That's probably going to get tougher before it gets better and that might last for a good little while," Chambers said, adding that public spending in the United States and Europe would remain weak.

As a result, Chambers said, "many of our customers continue to anticipate a challenging next 12 months on a global basis and therefore these CEOs will remain conservative both in their IT expenditures but also in their hiring."

Factoring that in, Cisco expects revenue growth, excluding items and its acquisition of TV software developer NDS, to range from 2 to 4 percent while earnings per share are seen up 5 to 0 percent at 45 to 47 cents, in line with analysts' expectations.

The San Jose, California-based company also said its dividend will rise to 14 cents per share in the first quarter of fiscal 2013 and that it plans to return a minimum of 50 percent of free cash flow annually through dividends and share repurchases.

Analysts welcomed the dividend hike but some wondered how revenue growth could be improved.

"It's a significant increase and now they've got a real yield," BGC analyst Colin Gillis said about the dividend, adding that he estimated the yield was at 3.2 percent versus 1.8 percent previously.

JMP Securities analyst Erik Suppiger said that while investors are happy that the spending cuts are boosting Cisco's profits, revenue growth is essential to the networking giant's long-term success.

"Ultimately the company needs to generate some acceleration in revenue growth," Suppiger said.

He added that it remains to be seen whether Chambers can get revenue growing again if he continues to cut spending, particularly sales and marketing.

Cisco kicked of a major restructuring program last year that included plans to slash about 15 percent of its work force and cut expenses by about $1 billion.

Last month it announced it would cut another 1,300 jobs across the company.

Cisco's fourth-quarter results beat estimates, thanks to cost savings and a continuing restructuring program.

Quarterly net income, excluding items, was $2.5 billion or 47 cents per share, compared with analysts' average estimate of 45 cents a share as compiled by Thomson Reuters I/B/E/S.

Revenue rose 4 percent from the year-ago quarter to $11.7 billion, compared with a Street view of $11.61 billion.

Cisco shares rose 5 percent to $18.23 after closing up 1 percent at $17.35 on Nasdaq.

(Reporting By Nicola Leske; Additional reporting by Jim Finkle; Editing by Richard Chang)

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