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Profit slips, but Cisco upbeat on strong sales

CEO John Chambers says he expects Cisco Systems to continue with its strong momentum into the next quarter.

Cisco Systems saw strong sales in its third fiscal quarter of 2006 as it integrated products from the Scientific Atlanta acquisition into its portfolio, but profits remained flat as Cisco accounted for stock compensation costs and costs associated with its acquisitions.

Cisco's total revenue rose to $7.32 billion in the third quarter for fiscal year 2006, compared with $6.19 billion in the same quarter last year, an increase of 18 percent year over year. Scientific Atlanta, which officially became a part of Cisco in February, contributed $407 million in sales.

While news on the sales front was good, Cisco's profits were relatively flat compared with the year earlier. Net income fell to $1.4 billion from $1.41 billion, a year ago.

Still, Cisco CEO John Chambers said during the conference call with analysts that the third quarter was very strong, and that Cisco is on track to keep up the momentum in the current quarter.

"We were extremely pleased with what we saw as a very strong quarter," he said. "The challenges we see aren't any more than what we traditionally see. The fourth quarter should be a solid quarter for us."

Specifically, Cisco expects sales of $7.8 billion to $7.95 billion in the fourth quarter of 2006, or an 18 percent to 21 percent increase from a year ago. Excluding sales from Scientific Atlanta, which is expected to contribute about $500 million in revenue, Cisco would expect sales to be up between 10 percent and 12.5 percent, compared with the same quarter a year ago. In total, Cisco expects its annual revenue to be $28 billion, an increase of 14 percent from the previous year.

Chambers also acknowledged that some of its technology peers are starting to be more cautious. But he said Cisco will likely be unaffected.

"While we're concerned by recent cautious outlooks by some of our large peers, we feel we are uniquely positioned in the market," he said. "And we are finding that our momentum and mind share is increasing on a worldwide basis."

Analysts on the call seemed confused by Chambers' upbeat tone in light of the modest year-end forecast. Charles Giancarlo, chief development officer for Cisco, said in an interview following the conference call that their concerns were overblown.

"We are always conservative going into these calls," he said. "The analysts wanted to see a bigger number from us."

He also explained why Cisco is so confident that it will continue to perform well when other companies such as Dell try to temper Wall Street expectations. On Monday, Dell told investors to expect its first-quarter revenue to come in at the low end of the range it provided earlier this year.

"The PC vendors are not in the communications sector," he said. "And communications is in a different growth stage. We don't feel Cisco is tied to the ups and downs of the PC market. We are more broadly based and benefit more from cycles in upgrades of switching and routing gear."