Cisco Advances as Revenue Holds Up Even Amid Economic Slowdown

By Vivek Shankar

Aug. 6 (Bloomberg) -- Cisco Systems Inc., the largest maker of networking equipment, jumped 7.3 percent after Chief Executive Officer John Chambers's forecast for the next six months eased investor concern that business is deteriorating.

Fourth-quarter profit beat analysts' estimates by a penny, revenue surpassed $10 billion for the first time, and sales this quarter and next will be in line with projections, San Jose, California-based Cisco said yesterday.

Financial-services customers and other large corporate clients are investing in new equipment to manage computer networks after paring orders a year ago, Chambers, 58, said in an interview. That helped boost sales of switches, Cisco's biggest product line, by 5 percent in the fourth quarter, up from growth of 3 percent in the previous three months.

``Many people were mentally prepared for a slightly lower outlook,'' said Simon Leopold, an analyst at Morgan Keegan & Co. in New York. He expects the shares to perform in line with the industry and doesn't own any. ``It's a bit of relief rally, sort of `We're happy it's not worse.'''

Cisco rose $1.66 to $24.31 in extended trading yesterday. If the gain holds today in regular Nasdaq Stock Market trading, it would be the biggest jump in two years. The shares had fallen 16 percent this year before today.

Sales will increase about 8 percent this quarter, Chambers said yesterday, indicating revenue of about $10.3 billion. Analysts predicted $10.4 billion, according to a Bloomberg survey. In the second period, revenue will rise 8.5 percent, in line with the average prediction by analysts.

``It's too early to call this a trend,'' Chambers said. The company may continue to see economic challenges for the next few quarters, he said.

Trimming Expenses

To weather the slowdown, Chambers said he will expand Cisco's product lines and trim expenditures. Operating expenses will drop to about 37 percent of sales this quarter, down from about 40 percent in the period just ended. Demand is also rising for the TelePresence videoconferencing system, Chambers said.

The company departed from its usual practice of issuing an annual forecast, saying it won't make that prediction until revenue growth starts to reaccelerate.

Fourth-quarter net income advanced 4.4 percent to $2.01 billion, or 33 cents a share, from $1.93 billion, or 31 cents, a year earlier, Cisco said. Excluding costs such as stock-based compensation, profit was 40 cents a share, compared with the 39 cents estimated by analysts.

Revenue climbed 9.9 percent to $10.36 billion. Analysts in a Bloomberg survey predicted $10.3 billion.

Positive Sign

Orders in the enterprise unit, which caters to Cisco's biggest customers, rose 13 percent in the fourth quarter, which ended July 26.

``People are still putting their money where their mouth is,'' said Barry Jaruzelski, a technology analyst at consulting firm Booz Allen Hamilton Inc. in New York. ``It's a very positive sign.''

Cisco's sales to phone and cable-television companies, known as service providers, slowed as some clients delayed purchases. Orders grew 5 percent in the fourth quarter, down from 6 percent in the third quarter, and 20 percent in the period before that.

The business was ``mixed, both by companies and geographies,'' Chambers said on the call. It accounts for about 24 percent of sales, according to Credit Suisse Group AG.

Investors consider Cisco to be a barometer for the technology industry because it dominates the market for routers and switches. The report followed earnings from Google Inc. and Microsoft Corp. last month that disappointed investors.

Chambers reiterated that Cisco's business may not rebound until 2009. Still, ``no one really knows,'' he said.

To contact the reporter on this story: Vivek Shankar in San Francisco at vshankar3@bloomberg.net