Cisco Rises as Profit Tops Estimates on Price Reductions

Cisco Systems Inc. (CSCO), the biggest maker of computer networking equipment, rose the most in almost three months after its profit topped analysts’ estimates, price reductions helped spur sales and cost cuts kept margins intact.

The shares jumped as much as 8.3 percent today after Cisco said in a statement yesterday after markets closed that profit excluding some costs was 48 cents a share in the first fiscal quarter ended Oct. 27. Analysts anticipated 46 cents a share, the average of data compiled by Bloomberg.

Chief Executive Officer John Chambers boosted profit by cutting expenses, shutting businesses and reducing prices to win back sales lost to Hewlett-Packard Co. (HPQ) and Arista Networks Inc. Cisco’s pricing and job cuts appeared to drive earnings growth, pleasing some investors while highlighting concerns about the company’s ability to maintain profit margins, said Bill Kreher, an analyst at Edward Jones. He has a hold rating on the stock.

“Cisco was able to beat a low bar, and given concerns about the fiscal cliff and potential spending woes from enterprise, this was a bit of a pleasant surprise,” Kreher said in an interview. “Competition will remain fierce. Cisco is entering a period of unprecedented competition, especially on the pricing side. We will closely be watching what happens with margins.”

Shares of San Jose, California-based Cisco rose 4.8 percent to $17.66 at the close in New York, the biggest increase since Aug. 16. The stock has declined 2.3 percent this year.

Weaker Demand

Net income climbed 18 percent to $2.09 billion, or 39 cents a share, from $1.78 billion, or 33 cents, a year earlier. Revenue rose 5.5 percent to $11.9 billion, compared with analysts’ projection for $11.8 billion.

A central challenge facing Cisco is how to maintain its level of profitability at a time when demand is weaker in key markets such as Europe and the U.S., while startups and established rivals pose a growing threat.

The company’s gross profit margin a decade ago was 69 percent of revenue. In the latest period it was 61 percent of revenue.

For the fiscal second quarter through January, Cisco forecast profit excluding some costs of 47 cents to 48 cents a share, compared with analysts’ prediction for 47 cents. Revenue will rise 3.5 percent to 5.5 percent from a year earlier, which translates to a range of $11.9 billion to $12.2 billion. Analysts had projected, on average, sales of $12.02 billion.

Market Challenge

Cisco’s total product orders were unchanged in the first quarter from last year, Chambers said on a conference call yesterday with analysts. Spending by U.S. telecommunications- service providers and large companies rose, while government bookings declined, he said. Europe, Middle East and Africa orders fell 10 percent.

Cisco’s dominance is being challenged in networking by established vendors such as Hewlett-Packard, Juniper Networks Inc. (JNPR) and Huawei Technologies Co., and in related markets such as security by Palo Alto Networks Inc. (PANW) and other smaller firms.

Chambers has cut 7,800 jobs over the past year, closed businesses such as the Flip video-camera unit and eliminated bureaucratic bottlenecks in a bid to focus Cisco’s resources on the company’s key networking businesses and speed decision- making.

The debt crisis in Europe has slowed Cisco’s attempts at a turnaround. The region made up a quarter of sales in the 2012 fiscal year. A shift toward “software-defined networking,” or using software to perform tasks now handled by pricey networking equipment, could pose a longer-term threat, potentially reducing Cisco’s sales.

To contact the reporter on this story: Jordan Robertson in San Francisco at jrobertson40@bloomberg.net

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

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