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Cisco Jumps on Forecasting Sales Growth Amid Global Slowdown

  • Revenue in current quarter may increase as much as 4 percent
  • Company not `seeing any kind of panic,' CEO Robbins says

Cisco Systems Inc., whose equipment is the backbone of the Internet, jumped the most in almost three years after predicting sales that may beat some analysts’ estimates, countering concern that corporate spending is falling off amid signs the global economy is weakening.

The company said third-quarter sales may grow as much as 4 percent from the preceding period, sending shares up 9.6 percent to $24.68 at the close Thursday in New York, the biggest single-day gain since May 2013. Cisco on Wednesday also reported revenue and profit in the fiscal second quarter that topped analysts’ estimates.

Cisco’s reach in computer networking makes its earnings an indicator of whether government and corporate budgets are tightening. It’s the first large technology company to report earnings following the global selloff in equity markets in January.

“One of the messages that people get out of this is that the global economy didn’t slow quite as much as the stock market indicated,” said Michael Genovese, an analyst at MKM Partners. “It’s encouraging for tech in general. Now we have this better data point from Cisco.”

No Panic

While the company isn’t predicting a surge in growth, its forecasts may be a sign that demand isn’t slowing as quickly as some investors thought. Chief Executive Officer Chuck Robbins said that Cisco had suffered weaker orders for networking switching equipment in January as some corporate customers decided to suspend their upgrade programs until they have more confidence that the slide in global stocks isn’t a harbinger of a deeper economic decline.

“I don’t think there’s any sort of a panic,” Robbins said. “I believe that customers are trying to digest what’s going on and trying to understand it. It’s completely connected to the uncertainty.”

Cisco forecast that profit before certain costs in the current quarter will be 54 cents to 56 cents a share and revenue will rise 1 percent to 4 percent, indicating sales of $12 billion to $12.4 billion. That compares with average analyst projections for profit of 55 cents a share on $12 billion in sales, according to data compiled by Bloomberg.

“There seems to be an emotional reaction that’s occurring right now,” Robbins said of the economic climate. “You see the markets get rattled, which causes our customers to get concerned, which causes them to tap the brakes, which causes CEOs of public-traded companies to be cautious, which then rattles the markets more -- which creates this vicious cycle. We have to be careful that we don’t create some self-inflicted dynamic here.”

Changing Technology

Outside of choppy economic conditions, Robbins is trying to navigate his company through a change in networking technology that some analysts have argued will continue to hurt Cisco’s ability to return to its historically high growth rates. As more computing and Internet traffic is routed to remote data centers run by a few large providers such as Google Inc. that write their own software and put together their own equipment, some analysts suggest demand for Cisco’s comprehensive solutions will wane.

The San Jose, California-based company has countered that not all computing needs can be met in the cloud. It has introduced new equipment that’s simpler and cheaper and opened up its software to other programs.

From 2000 to 2010, the networking equipment pioneer averaged 13 percent annual sales growth. Since then, gains have averaged 4.3 percent.

Quarterly Results

In the quarter ended Jan. 23, Cisco reported net income of $3.1 billion, or 62 cents a share, compared with $2.4 billion, or 46 cents, a year earlier. Sales were little changed at $11.9 billion. Excluding some costs, profit was 57 cents a share, compared with an average analyst prediction of 54 cents a share on revenue of $11.8 billion.

Switching sales, which account for 29 percent of the company’s total revenue, decreased 4 percent to $3.48 billion in the second quarter from a year earlier, the company said.

Gross margin, or the percentage of sales remaining after deducting the costs of production, was 63.8 percent in the quarter, wider than the 61.7 percent posted a year ago. Brian White, an analyst at Drexel Hamilton, cited Cisco’s profitability as evidence that Cisco is performing well in a tough environment.

The company also announced it would add $15 billion to its stock buyback program. Cisco said it has $16.9 billion remaining on its previously authorized $97 billion repurchase plan.

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