Cisco profits and revenue rise but still disappoint

Networking giant falls slightly short of revenue expectations for the fourth quarter, sending its stock price down after the market closed.

Cisco Systems fell slightly short of revenue expectations for the fourth quarter of fiscal year 2010, as the uncertain economy caused a hiccup in sales.

For the quarter, which ended July 31, Cisco posted a profit of $1.94 billion, or 33 cents a share, up from $1.08 billion, or 19 cents a share, during the same quarter a year ago.

Excluding stock compensation costs and other items, earnings were 43 cents, up from 31 cents in the year-ago quarter.

Revenue was $10.84 billion for the quarter, up 27 percent from a year ago. And it was in line with what Cisco projected during its conference call in May. The company said then it would see 25 percent to 28 percent growth in revenue compared with last year.

Still, analysts expected Cisco to make 42 cents a share on revenue of $10.88 billion, according to Thomson Reuters.

The company's stock was trading down about 5 percent in after-hours trading.

Cisco's supposed quarterly miss wasn't off by much. And the truth is that the company's profits were up by 79 percent compared with a year ago. So why the stock drop? What shook Wall Street was the fact that Cisco is being affected by the slowing of the economic recovery.

Cisco, which is the largest supplier of Internet gear to large businesses, service providers, and governments around the world, is often considered a bellwether for the technology industry and the economy in general. Its results often show economic booms and busts two to three quarters ahead of what the general economy is seeing.

During the conference call with analysts and investors, Cisco CEO John Chambers said the company's customers put on the spending brakes during the quarter due to economic uncertainty. He said that he and his customers are getting mixed signals about the economy. But he said that Cisco still expects to grow its business and meet projected sales and growth targets.

"What we're seeing that's surprising is how quickly they (our customers) took their foot off gas pedal and then put it right back down," he said. "There's still good solid improvement . But it's not what you would expect compared to what we saw a few months ago."

Six months ago, Chambers said on a conference call with investors and analysts that the economic recovery was well under way. He was upbeat about the future and said he saw a strong acceleration in sales that he expected to continue. Still, even then Chambers remained conservative in Cisco's estimates, and he warned that economic growth could be slow. So it added weight to his concerns when on Wednesday he admitted that the current uncertainty that customers are feeling about the economy is "unusual."

"I usually can call it one way or another," he said. "But there are real mixed signals from the economy."

He called the economy a "wild card," and he cited the Federal Reserve's move on Tuesday to buy government debt as an example. More economic bad news about slowing growth in China, coupled with the Feds announcement, sent stocks across Wall Street way down on Wednesday.

Even though the macro economic outlook looks troubling, Chambers said he and many of his customers are seeing positive trends within their own businesses. Still, customers are skittish about spending in the short term. And Chambers said that executives are "uncomfortable" about capital spending budgets or how many new employees they can hire.

As for Cisco, Chambers said the company sees a strong pipeline of sales across its product lines and across all geographies where it sells its products. He anticipates the company will meet its longer term growth targets of between 12 percent and 17 percent.

He emphasized that Cisco is well positioned for strong growth when the economy comes to a full recovery. As a result, Cisco is continuing to invest in new businesses, such as video conferencing. And it is also hiring new employees again. It added nearly 2,000 new employees in the fourth quarter of fiscal 2010, and it plans to add another 3,000 employees in the coming quarters.

"The key takeaway I want to leave you with is that our strategy and vision is absolutely working," he said. "We are gaining market share and growing revenue. (From a customer perspective,) we are moving from a box player to really becoming a key business partner, and trusted technology adviser."

"So in terms of things we can control, we are in great shape," he added. "And the concerns we have are the normal cautious concerns we have about economy in general."

Updated 4:17 p.m. PDT:This story was updated with information from the conference call, including comments from Cisco CEO John Chambers.

 

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