Bloomberg News

Cisco Surges After Profit Exceeds Analysts’ Estimates

May 16, 2013

Cisco Third-Quarter Profit Tops Estimates on Data-Traffic Demand

Cisco Systems Inc. is benefiting as companies step up investments in data-traffic networks to accommodate users who are increasingly relying on smartphones and tablets to watch video and surf the Web. Photographer: David Paul Morris/Bloomberg

Cisco Systems Inc. (CSCO), the biggest maker of networking equipment, rose the most in more than a year after reporting profit that topped estimates as businesses spent more to meet surging demand for data delivery via the Web.

Profit excluding some items was 51 cents a share, the San Jose, California-based company said in a statement yesterday, exceeding analysts’ average 49 cent projection, according to data compiled by Bloomberg. Cisco advanced 13 percent, for the biggest gain since August 2011.

Cisco is benefiting as companies step up investments in data-traffic networks to accommodate users who are increasingly relying on smartphones and tablets to watch video and surf the Web. Price cuts are also bolstering sales of traditional switches and routers, while technologies added in recent acquisitions are helping Cisco expand in servers and wireless networking, said Jason Ader, an analyst at William Blair & Co.

“They’re focused on where they can really make a dent in their growth,” said Ader, who has the equivalent of a buy rating on the shares. “Overall, they’ve gotten more aggressive and more engaged.”

For the fourth quarter, which ends in July, Cisco forecast profit excluding some items of 50 cents to 52 cents a share, compared with an average analyst estimate of 51 cents. Sales will rise 4 percent to 7 percent from a year earlier, Cisco said, indicating a range of $12.16 billion to $12.51 billion. Analysts on average predicted $12.47 billion.

Shares Jump

The stock advanced to $23.89 at the close in New York. The shares have gained 22 percent this year, compared with a 16 percent increase for the Standard & Poor’s 500 Index.

In the third quarter, which ended April 27, net income rose 14 percent to $2.48 billion, or 46 cents a share, from $2.17 billion, or 40 cents, a year earlier. Revenue climbed 5.4 percent to $12.22 billion, beating analysts’ prediction of $12.17 billion.

Orders from U.S. corporations helped buoy sales, while demand was weak in southern Europe and China, Chief Executive Officer John Chambers said on a conference call. Business elsewhere in Europe is starting to “bottom out,” and China should remain sluggish for several more quarters, Chambers said.

Third-quarter product orders from the Americas grew 7 percent from a year earlier, while orders in Asia grew 1 percent. Orders from Europe, the Middle East and Africa were little changed.

Margins Steady

Gross margin, or the percentage of sales left after subtracting production costs, was 63 percent on an adjusted basis, Cisco said. That compared with analysts’ projections for 61.9 percent, and with 63.1 percent a year earlier. Analysts have been closely watching gross margin, a measure of profitability, as Cisco has expanded into areas such as computer servers that are less lucrative than routers and switches.

Cisco seems to be taking market share from Juniper Networks Inc. (JNPR:US) and other rivals, helping lift results in an otherwise-lackluster market for networking gear, said Joanna Makris, an analyst at Mizuho Securities USA Inc. in New York who has a buy rating on the stock.

“Competitively, they’ve got it together,” Makris said. “You’re starting to see that in the numbers.”

Business Focus

Chambers has stepped up acquisitions to bolster the company’s core business of routers and switches for large companies and telecommunications carriers.

Last month, Cisco agreed to buy U.K. networking company Ubiquisys for about $310 million, gaining technology that helps wireless carriers provide better service to smartphone and tablet users. The transaction followed purchases in recent months of Intucell Ltd. for $475 million and Meraki Inc. for $1.2 billion.

In March of last year, Cisco agreed to buy NDS Group Ltd. for about $5 billion to tap demand for technologies that deliver and protect pay-TV content.

Cisco is also shedding units. In January, the company said that it sold its Linksys home-router unit for an undisclosed price, which followed earlier moves to exit consumer businesses such as the Flip video-camera unit.

Chambers has also cut jobs, shut businesses and reduced prices to fend off competition from Hewlett-Packard Co. (HPQ) and Juniper Networks Inc. (JNPR) Cuts announced in March brought the total number of positions Chambers has eliminated in the past two years to more than 8,300 as the company has shuttered units and expanded in corporate software and technology services.

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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