Cisco’s Forecast Tops Estimate as CEO Seeks Turnaround

Cisco Systems Inc. gave a forecast for fourth-quarter profit and sales that topped analysts’ estimates, as Chief Executive Officer John Chambers seeks to restore growth and prepare the company to meet new challenges.

Orders in the U.S. are climbing on demand for networking machines to handle mobile-data traffic. Revenue in the current period through July will be $12 billion to $12.3 billion, based on the company’s forecast for a drop of 1 percent to 3 percent. Analysts were projecting, on average, sales of $11.8 billion.

Chambers, CEO for 19 years, is working to turn around the world’s largest networking-equipment maker before handing it over to a successor. He cut the company’s multiyear forecast in December, after exiting consumer businesses, reducing staff and restructuring management. Network upgrades, driven by mobile devices, are making up for weaker demand as companies build their own equipment, using software to buy fewer machines.

“This was a classic case of low expectations from the Street; sentiment was in the negative,” said Chris Bertelsen, chief investment officer of Sarasota, Florida-based Global Financial Private Capital, which owns Cisco shares.

Revenue in the fiscal third quarter, which ended April 26, declined 5.5 percent to $11.5 billion, the company said in a statement yesterday. That beat the average analyst estimate for $11.4 billion, according to data compiled by Bloomberg. Profit, excluding items, was 51 cents a share, exceeding a projection for 48 cents.

Networking Shift

Cisco shares rose 6 percent, the biggest jump since May 2013, to $24.18 at the close in New York.

Net income in the third quarter fell to $2.18 billion, or 42 cents a share, from $2.48 billion, or 46 cents, a year earlier. For the fourth quarter, profit, excluding stock-based compensation, amortization and other items, will be 51 cents to 53 cents a share. Analysts projected 51 cents on average.

The San Jose, California-based company is facing slowing growth for its market-leading routers and switches as companies replace legacy network hardware with software that performs many of the same tasks. The trend, called software-defined networking, has been embraced by companies including Google Inc. and Facebook Inc.

“The industry has been doing a lot of work to become less reliant on Cisco,” said Matt Robison, an analyst at Wunderlich Securities Inc. in San Francisco who has a hold rating on the stock.

Heavy Lifting

Cisco’s orders in the U.S. rose 7 percent, while emerging markets fell 7 percent led by declines in Russia and Brazil, Chambers said on a conference call.

“Our clear goal is to return to growth,” Chambers said on a conference call yesterday. “We’ve got some real heavy lifting to do and I’m sure there will be a couple bumps along the way, especially in emerging markets.”

In December the company reduced its forecast for average sales growth to 3 percent to 6 percent in the next three to five years, down from an earlier projection for a 5 percent to 7 percent rise.

Chambers said today that the percentage of Cisco employees in the U.S. has dropped below 50 percent of the workforce for the first time, which he attributed to U.S. laws that prevent the company from bringing international profits back without repatriation taxes. While he ruled out moving Cisco’s headquarters to another country, he said other companies may consider different options.

“Our tax system here is causing us to lose jobs,” Chambers said on Bloomberg TV. “We have to fix this.”

More Pressure

The company has come under increased pressure from rivals including Huawei Technologies Co. and Juniper Networks Inc. in its core businesses, while newer competitors such as Palo Alto Networks Inc. and FireEye Inc. take share in growing markets such as computer and network security.

Cisco’s moves have included killing its Flip video-camera unit, selling its Linksys home-router division and reining in a council-style management structure that was blamed for alienating employees and creating a slow-moving bureaucracy. Cisco said on May 1 it was discontinuing its WebEx Social service and replacing it with a competing product from Jive Software Inc., a concession that Cisco’s collaboration software for businesses has lagged rivals.

Cisco said in August that it was cutting 4,000 jobs, or 5 percent of its workforce, bringing to 12,300 the number of positions Cisco has eliminated over the past two years.