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Cisco shares up 5% on results, raised forecast

Wed, 02/07/2007 - 6:45am

Copyright 2007 MarketWatch.com Inc.
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By John Shinal, MarketWatch

NEW YORK - Cisco Systems Inc. shares rose as much as 5% in early trading Wednesday after the company reported a 40% increase in quarterly profit and raised its sales forecast.

Late Tuesday, Cisco (CSCO) said earnings soared in its fiscal second quarter on its acquisition of Scientific Atlanta and robust demand for Internet equipment from telecom companies and small businesses.

Company executives also raised their forecast for revenue growth during the current quarter ending in April.

The San Jose, Calif.-based giant said net income for the fiscal second quarter ended Jan. 27 rose to $1.92 billion, or 31 cents a share, from $1.38 billion, or 22 cents, a year earlier.

Excluding the cost of employee stock options and other items, Cisco said it would have earned 33 cents a share, more than the estimate of 31 cents a share from analysts surveyed by Thomson Financial.

Sales surged 27% to $8.44 billion, beating expectations of $8.28 billion, as telecom firms and corporations upgraded their networks and Cisco expanded its push into newer markets, such as storage equipment and low-cost consumer networking gear.

Scientific Atlanta, acquired by Cisco for $6.9 billion in February 2006, contributed $639 million in revenue, mostly from sales of set-top boxes used to provide digital services to cable customers.

Consumer demand for high-definition television and video-on-demand is prompting cable operators like Comcast and Time Warner Cable to upgrade their networks to carry digital signals. Cisco is selling them set-top boxes and sophisticated routers that let telecom service providers roll out and manage those services.

"The cable business is dynamic," said Walter Price, a portfolio manager with RCM Capital Management in San Francisco, which owns Cisco shares. "We still like Cisco a lot," even though the shares are up 60% during the last six months.

The stock hit a multi-year high of $28.99 on Jan. 11.

Shares took off last August, when Chief Executive John Chambers raised the company's forecast for annual growth to a range of 15% to 20%, from a prior forecast of no more than 15%.

They surged in late trading Tuesday after Chambers forecast year-over-year sales growth for the current quarter in a range of 19% to 20%, higher than analysts' expectations of 17% growth.

Cisco's stand-alone growth rate, which excludes Scientific Atlanta sales, was forecast at 15% to 17%, higher than previous company forecasts.

"Momentum remains strong," Chambers said on a conference call to discuss the results.

Chambers reiterated previous statements that he expects Cisco's long-term revenue growth rate to be in a range of 10% to 15%.

Chief Financial Officer Dennis Powell said on the conference call that Cisco's stand-alone sales during the quarter rose 18% from a year earlier, while sales of Scientific Atlanta products climbed 21%.

As the No. 1 maker of Internet routers, Cisco is benefiting as phone companies and cable providers race each other to combine voice calls, broadband connections and on-demand video into a single service. Router sales rose 18% from a year earlier.

Sales growth of the data switches used mostly by corporate customers was 13%, but sales of storage gear jumped 45%.

Cisco saw some of its fastest growth among small and mid-sized businesses. Orders from those customers rose 20% from a year earlier, Chambers said, while orders from telecom-service providers rose in the "mid-teens" and orders from large corporations climbed 12%.

The company will get what Chambers called "a one-time revenue benefit" during the next few quarters from federal regulations that require Internet providers to change how they secure their networks.

Cisco expects the regulatory change to spur more sales of Scientific Atlanta set-top boxes. The company shipped 100,000 units during the fiscal second quarter.

Cisco's inventory rose, in part because it is gearing up for higher shipments to telecom customers.

Powell forecast that Cisco's future tax rate will be 25%, down from a previous forecast of 26%.

The company's fiscal third-quarter results will also benefit from an extra month of Scientific Atlanta sales, Chambers said. Without that benefit, the two companies will post year-over-year sales growth of 16% to 17%, he said.

The company's profit margin narrowed from a year ago as sales of lower-cost, less-profitable gear to consumers and small businesses contributed a greater share of Cisco's revenue.

Cisco's gross margin fell to 63.8% of sales, from 67.4% a year earlier, while its operating profit margin slipped to 25.2% from 26.1%.

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