Cisco Systems Second-Quarter Margin Misses Estimates

Cisco Systems Inc., the largest provider of networking equipment, posted a gross margin that missed analysts’ estimates as the company spent more to develop products and competitors undercut them on prices.

Gross margin, or the percentage of profit left after subtracting production costs, fell to 62.4 percent in the period ended Jan. 29, the San Jose, California-based company said today. That missed the 63.3 percent average of projections compiled by Bloomberg.

Research and development costs climbed 19 percent in the quarter, while sales and marketing expenses rose 15 percent. That outpaced a 6 percent sales increase. Cisco may be cutting its prices and extending better terms to its customers, giving them longer to pay, said Mark Sue, an analyst at RBC Capital Markets in New York.

“The product gross margins declined quite meaningfully,” Sue said. “We know demand is improving, but will Cisco capitalize on that? And will it have to resort to price cuts to get its fair share?”

Cisco fell as much as 10.3 percent to $19.77 in late trading, after rising 5 cents to $22.04 at 4 p.m. New York time in Nasdaq Stock Market trading.

Routers and Switches

Profit excluding some items this quarter will be 35 cents to 38 cents a share, short of the 40-cent average prediction. Sales will rise 4 percent to 6 percent from a year earlier, the company said today on a conference call. That would mean revenue of $10.8 billion to $11 billion. Analysts on average estimated sales of $10.9 billion, with some projecting as much as $11.3 billion.

Photographer: Joshua Roberts/Bloomberg

John Chambers, chief executive officer of Cisco Systems Inc. Close

John Chambers, chief executive officer of Cisco Systems Inc.

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Photographer: Joshua Roberts/Bloomberg

John Chambers, chief executive officer of Cisco Systems Inc.

Investors look to Cisco as a bellwether for the technology industry because it dominates the market for routers and switches, products that direct the flow of Internet traffic. Companies buy its switches for corporate networks, while phone and Web-service providers typically purchase Cisco’s more- expensive routers.

Earnings excluding some costs were 37 cents a share, Cisco said. That compared with 35 cents, the average of projections compiled by Bloomberg. Sales rose to $10.4 billion, also topping the average $10.2 billion estimate.

‘Bumpy’ Transitions

The public sector in the U.S., Europe and Japan is facing budget constraints that will affect spending for the next several quarters, Chief Executive Officer John Chambers said on a conference call with analysts.

“Any time you make market transitions, they’re bumpy,” Chambers said in an interview. “This one is turning out to be more challenging than I would like. But if you look out a year from now I’m very comfortable with where we’re positioned.”

Cisco’s expansion into more than 30 new businesses such as servers, consumer video and smart-grid utilities is aimed at helping the company reach a long-term goal of 12 percent to 17 percent revenue growth. Its broadened ambitions have left cracks, with Juniper Networks Inc., Hewlett-Packard Co. and Brocade Communications Systems Inc. making inroads in the switch market, according to Mark McKechnie, an analyst at Gleacher & Co. in San Francisco.

“They’ve become the Procter & Gamble of networking,” said Joanna Makris, an analyst at Mizuho Securities USA Inc., referring to the world’s largest consumer-products company, which has more than 70 brands. “The stocks that have outperformed them have been the more focused, nimble companies.” Makris has a “neutral” rating on the stock and doesn’t own it.

Dell, Huawei

Dell Inc. and Huawei Technologies Co. have also been able to undercut Cisco on prices for certain switches and routers, said Nikos Theodosopoulos, an analyst at UBS Securities LLC in New York.

Net income fell to $1.52 billion, or 27 cents a share, from $1.85 billion, or 32 cents, a year earlier, the company said.

The company, which has about $40 billion in cash, plans to issue its first dividend in the first half of the year. Last week, it agreed to buy Inlet Technologies for $95 million in cash, and said last month it would purchase networking company Pari Networks for an undisclosed price.

Juniper, the second-largest U.S. maker of networking gear, said last month that profitability will improve this year as customer demand helps sales rise at a faster rate than research and development costs. The company’s shares have climbed more than 60 percent in the past year.

To contact the reporter on this story: Joseph Galante in San Francisco at jgalante3@bloomberg.net

To contact the editor responsible for this story: Tom Giles at tgiles5@bloomberg.net

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