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Cisco Exceeds Profit, Sales Estimates as It Outperforms Rivals

Cisco Systems Inc., the biggest maker of networking equipment, beat profit and sales estimates, defying concerns that delays in network upgrades by phone and cable companies would drag down revenue.

Fiscal second-quarter net income rose to $2.18 billion, or 40 cents a share, from $1.52 billion, or 27 cents, a year earlier, the company said yesterday in a statement. Excluding certain items, earnings were 47 cents in the period ended Jan. 28. Analysts in a Bloomberg survey had estimated 43 cents.

Chief Executive Officer John Chambers began a turnaround plan at Cisco last year, when he cut jobs, eliminated businesses and refocused on more profitable products. Cisco also has gotten more competitive on price, putting pressure on rivals. It reported 12 percent growth in orders from service providers -- customers that were blamed for weak results at Juniper Networks Inc. and other equipment makers.

“The company has been talking a lot about getting more aggressive with individual competitors,” including Hewlett-Packard Co., Juniper and Huawei Technologies Co., said Erik Suppiger, an analyst at JMP Securities LLC in San Francisco. Cisco appears to be managing the impact of lower prices on its bottom line, he said.

Frank Calderoni, Cisco’s chief financial officer, said longstanding relationships and newer products helped win deals with service providers.

“It comes down to a competitive situation and what we have to offer,” he said in an interview.

Third-Quarter Revenue

Cisco predicted a third-quarter revenue gain of 5 percent to 7 percent. That equates to about $11.4 billion to $11.6 billion, compared with an average estimate of $11.5 billion. Excluding some costs, earnings will be 45 cents to 47 cents a share. Analysts had projected 45 cents.

Cisco fell 3 cents to $20.40 in extended trading yesterday after the report. The stock, up 13 percent this year, had closed at $20.43 earlier in the day.

Matt Robison, an analyst at Wunderlich Securities in San Francisco, said the guidance wasn’t as aggressive as some analysts and investors wanted. Robison recommends buying the stock. The results showed that Cisco has managed its restructuring efficiently, he said.

“Obviously one quarter doesn’t confirm that the job is complete, but it sure looks like they’ve gotten the job done,” he said in an interview. “It certainly seems like they’ve gotten their mojo back.”

The company raised its quarterly dividend to 8 cents a share, up from 6 cents earlier. San Jose, California-based Cisco initiated the payments last year.

Chambers’s Turnaround

Sales rose 11 percent to $11.5 billion in the second quarter, topping the $11.2 billion estimate. The company has been trying to reignite growth after years of sluggish networking spending and market-share losses to rivals. To make Cisco more nimble, Chambers fired thousands of workers last year and dissolved a cumbersome internal structure that slowed decision making.

About a third of Cisco’s revenue comes from communications providers, making it less reliant on the industry than rivals, said Joanna Makris, an analyst at Mizuho Securities USA Inc. in New York. She recommends buying the stock.

A slump in spending by phone and cable companies is taking a bigger toll on Juniper, Cisco’s biggest competitor. Telephone and Internet-service customers are delaying network upgrades, especially in the U.S., Juniper CEO Kevin Johnson said last month. Service providers account for more than half of his company’s revenue.

‘More Aggressive’

Cisco also is trying to win back market share by cutting prices. A January survey of more than 100 resellers of Cisco products by Robert W. Baird & Co. found almost half reported that Cisco has become “incrementally more aggressive on pricing in the past few months.”

Investors are watching Cisco’s margins for signs that the price cuts are eroding profitability. The gross margin was 61.3 percent in the recent quarter, compared with about 65 percent two years ago.

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