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Investors look favorably on Cisco shares

Stock in the networking equipment giant jumps 6 percent higher after it posted a third-quarter profit yesterday and announced a 2-for-1 stock split.

Stock in networking equipment giant Cisco Systems jumped 6 percent higher today after it posted a third-quarter profit yesterday that narrowly topped analysts' expectations and announced a 2-for-1 stock split.

Shares closed at 118.75, after flirting with a 52-week high earlier in the day. Shares have traded as high as 120 and as low as 41.125 in the past 52 weeks.

Cisco also invested $39 million in Portal Software and will use Portal's products for customer management and billing services.

Yesterday, the company reported net income of $646 million, or 38 cents a share, compared with net income of $484 million, or 30 cents a share, on a pro forma basis for the like quarter a year ago. The company took a $419 million charge in the year-ago quarter related to three acquisitions, reporting actual net income of $65 million, or 4 cents a share.

Wall Street anticipated earnings of 37 cents per share for the period ending May 1, according to a consensus estimate by First Call. Estimates from 29 analysts who follow Cisco ranged from 37 cents to 39 cents.

Quarterly revenue rose to $3.15 billion, a 44 percent increase from $2.18 billion a year ago.

"[The third quarter] is generally a challenging quarter for us, and will continue to be so, however we are very pleased with our revenue growth," Cisco chief executive John Chambers said on a conference call with analysts. "We had solid growth across all three of our major business lines: enterprise, service provider, and small and medium-sized business."

The 2-for-1 stock split, approved by Cisco's board of directors, is the company's eighth split and first since August 1998. The split will be effective for shareholders of record on May 24.

Chambers called the quarter "unusually smooth" and executives attributed the solid third-quarter results, which have dipped somewhat in recent years, to focus and good execution from the Cisco sales team.

But Cisco executives also said gross profit margins should continue to fall slightly due to shifts in the product mix and ongoing competitive pricing pressures.

"Our toughest competition continues to come from hundreds of new startup companies," Chambers said.

"By any measure, the quarter's performance was strong," Morgan Stanley Dean Witter data networking analyst Chris DePuy wrote in a research report today.

"Cisco's focus on innovative, next generation Internet-based software and equipment, we believe, will enable it to become a premier vendor to the service provider arena. Add that to the company's enviable market share positions in the growing enterprise data networking and Internet equipment markets," DePuy added.

DePuy maintained his "strong buy" rating on the stock with a 12-month price target of $135 a share.

Separately, Cisco announced last week that it had halted development of a switch that allows phone companies to combine voice and data traffic on a network. The computer switch, named TGX-8750, was expected to compete with technology from Ascend Communications, the networking equipment firm being acquired by Lucent Technologies.

Executive vice president Don Listwin told analysts during a conference call that Cisco "will lose some business" since it has delayed the development of the switch. Cisco plans to incorporate the technology into another product scheduled to ship later this year, according to a Bloomberg report.

Chief financial officer Larry Carter said he expects Cisco's expenses, which had been trimmed slightly in recent quarters, to grow at the same rate as sales over the next few quarters. During the third quarter the company added nearly 1,200 employees, bringing its worldwide workforce to more than 18,000.

Carter said Cisco intends to hire between 1,800 and 2,000 new employees--not counting the 650 new employees from previously announced acquisitions--during the fourth quarter.

Executives said the competitive landscape has not changed drastically in recent months and that several deals in the telecommunications industry have only served to bolster Cisco's view of a world with voice, video, and data on one network.

"Our goals have not changed," Chambers said. "Over the long run we intend to grow above the industry average, although given our size, growing above the industry average will continue to be a challenge."

Chambers maintained what he called his "normal healthy paranoia" about the impacts of the millennium bug, government regulation, and competition.

Some high-tech industry observers have speculated that businesses and governments would divert some of their technology budgets toward solving the Year 2000 problem this year. But Cisco executives said their concern about the effects of the Y2K bug on sales has waned.

"In terms of the Y2K challenges, we've seen surprising improvement over the last couple of months," Chambers said. "The Y2K issue ? will probably not be as challenging as we thought a quarter or two ago."

Bloomberg contributed to this report.