Cisco Shares Surge After Profit, Sales Top Analyst Estimates

Cisco Systems Inc. (CSCO) shares rose the most in more than nine years after the company’s profit and sales beat analysts’ estimates, the first time in six quarters that the shares gained the day after results.

Cisco rose $2.19, or 16 percent, to $15.92 at 4 p.m. New York time on the Nasdaq Stock Market. The jump was the biggest one-day increase since May 2002, and trimmed the stock’s loss for the year to 21 percent. Cisco was the biggest gainer in the Dow Jones Industrial Average, which rose 4 percent.

Cisco, the world’s biggest maker of networking equipment, has reined in operating expenses, unveiling a plan to cut about 6,500 jobs worldwide and closing the Flip video camera unit to concentrate on its more profitable switches and routers. Though the company’s gross margin, or the percentage of profit left after production costs, narrowed to 62.7 percent, Cisco forecast earnings this quarter that may top analysts’ estimates.

“Earnings were pretty solid and a lot of that is just due to op-ex cuts,” said Jayson Noland, an analyst at Robert W. Baird & Co. in San Francisco, who has a “neutral” rating on the shares. “Low single-digit growth at Cisco is disappointing and gross margin degradation is disappointing, but they’re offsetting some of that with headcount cuts.”

Profit, excluding some costs, was 40 cents a share in the fiscal fourth quarter, the San Jose, California-based company said yesterday. Analysts on average had predicted 38 cents, according to Bloomberg data. Sales rose 3.3 percent to $11.2 billion in the period, which ended July 30, compared with an estimate of $11 billion.

Net Income, Forecast

Net income fell to $1.23 billion, or 22 cents a share, from $1.94 billion, or 33 cents, a year earlier, Cisco said. The previously announced reorganization expenses weighed on profit in the period.

Sales will grow 1 percent to 4 percent in the current quarter, Chief Executive Officer John Chambers said on a conference call. That equates to as much as $11.2 billion. Analysts had predicted $10.9 billion. Profit before certain costs will be 38 cents to 41 cents a share, compared with an average analyst estimate of 39 cents.

Standard & Poor’s downgraded the U.S. credit rating to AA+ from AAA last week, roiling stock markets. That had raised concerns that technology spending might suffer. Central banks are trying to prevent a new recession, with Federal Reserve Chairman Ben S. Bernanke vowing earlier this week to keep borrowing costs at an all-time low to revive a recovery that’s “considerably slower” than expected.

‘Fundamental Change’

As part of a plan to reduce costs by $1 billion next year, Cisco said July 18 that it would eliminate workers through firings and an early-retirement program. It also sold a factory in Mexico. Cisco recorded pretax restructuring costs and other charges of $772 million last quarter.

“While I wish we had never had to go through this, it clearly was time for a fundamental change at Cisco,” Chambers said on the call. “I feel very confident about Q1 in terms of what we can control and influence, and we have built some conservatism into it.”

Cisco is making the cuts as rivals gain market share in both routing and switching, which combined made up half of the company’s revenue last year. Cisco’s share of worldwide switching revenue dropped 5.8 percentage points to 68.5 percent, and its share of router sales dropped 6.4 percentage points to 54.2 percent, according to a May report from Dell’Oro Group. Hewlett-Packard Co. (HPQ) gained switching share, while Juniper Networks Inc. (JNPR) added share in the router market.

To win back customers, Cisco introduced new products in the quarter, including upgrades to its flagship switches to handle more data and video traffic. The company also unveiled technology to improve efficiency and security of cloud networks and new products for its TelePresence conferencing system.

Five Priorities

Chambers said the company is focusing on five areas: routing and switching, workplace collaboration, data centers, video, and architecture that integrates the network.

“We feel comfortable with the progress we’ve made on the restructuring side,” Chief Financial Officer Frank Calderoni said in an interview yesterday. “We also feel comfortable with where we’re making investments to drive growth in those five top priorities for the company.”

Cisco’s results are seen as a bellwether for the technology industry because its switches and routers dominate the market. Organizations buy the switches to direct Internet traffic on their networks, while phone and Internet-service providers rely on the company’s routers.

“Even in a weak economy, there’s strong demand for Cisco’s products,” said Colin Gillis, an analyst at BGC Partners in New York, who recommends buying the shares. “They’re right smack in the middle of the growth of the Internet.”

To contact the reporters on this story: Zachary Tracer in New York at ztracer1@bloomberg.net; Ari Levy in San Francisco at alevy5@bloomberg.net

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

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