Cisco Beats Analysts' Q3 Revenue, Profit Expectations

Brian Womack Tue May 6, 7:02 PM ET

After spooking investors in the first two quarters, tech bellwether Cisco Systems gave some reassuring news on Tuesday, edging past analysts' third-quarter forecasts and predicting a solid fourth.

Excluding special items, the network gear maker earned 38 cents a share for the quarter that ended April 26, up nearly 12% over last year and about 6% over the average forecast of analysts polled by Thomson Reuters. Sales rose 10% to $9.8 billion, above views.

Officials cited healthier growth in Europe and Japan, and in the fast-rising economies of China and India -- though other emerging areas were weaker.

"The balance looks good, and at the present point, it's playing out pretty much as we expected," said Cisco CEO John Chambers, during a conference call. "It feels pretty steady."

Cisco executives expect sales in the current fourth quarter to grow 9% to 10%, putting the midpoint 15f guidance at $10.3 billion, in line with analysts' expectations.

"We are continuing to see U.S. and some European customers remain" cautious, Chambers said.

Cisco shares rose 1% in after-hours trading to around 26.70.

"Everything looks to be positive," said Kenneth Muth, an analyst with Robert W. Baird, who rated the stock neutral. The rating came before Cisco issued its fourth-quarter outlook.

Muth says the gross margins and the earnings were better than expected.

The report follows relatively upbeat results from other tech heavyweights such as hardware and software giant IBM (NYSE:IBM - News) and chipmaker Intel (NasdaqGS:INTC - News). Both companies cited solid international growth that buoyed sales.

Roughly half of Cisco's sales occur outside North America, buffering a sluggish U.S. economy, Muth says.

U.S. orders rose 5% in the third quarter over last year vs. 12% growth in the second quarter. European orders rebounded somewhat, climbing 14% vs. 8% in the prior quarter.

Cisco reported sales growth in the high teens for the Asia-Pacific region, while emerging markets sales rose 10% -- down from a 24% jump in the second quarter.

Investors closely watch Cisco's earnings results because it's the first big company whose results include numbers from April.

Cisco shares have crept up more than 10% since bottoming in February after the company warned that it wouldn't hit its long-term sales goals of 12% to 17% in the third quarter. CEO Chambers said orders dropped steeply in December and January, forcing him to roll back estimates.

It was the first time in five years Cisco had lowered its sales outlook, according to Philip Cusick, an analyst with Bear Stearns.

That warning followed a first-quarter report in November that showed orders from large U.S. corporations falling from the previous year. The news sent shivers through the market; Cisco's shares fell 9% the next day.

"They hit a slowdown in the U.S. two quarters ago," said Mark Mc-Kechnie, an analyst with American Technology Research, who rates the stock a buy. "That seemed to spread to Europe in February."

Cisco executives say it's not clear whether the worst is over.

"Our best estimate is that this is a relatively short-term challenge going forward," Chambers said during the call. "Whether we return to our longer-term growth averages in several quarters or a little longer is yet to be determined."

Analysts say investors have already factored much of that uncertainty into the stock price.

"I think a lot of the bad news is baked in," said Erik Suppiger, an analyst with Signal Hill.

He adds that Cisco's size and leadership in its markets have kept the stock from falling further.

The company continues to post solid results with its traditional networking gear lineups -- the routers and switches used to manage electronic traffic flowing between computers, phones and other devices throughout the world. Router sales rose 14% in the third quarter, while switch sales grew 3%.

Muth says service providers, including the big phone firms around the world, are snapping up equipment as they scramble to meet growing demand for video and other bandwidth-eating applications.

"Right now they're just trying to keep up," Muth said.

Last year, Cisco bought Web-conferencing firm WebEx and continues to push videoconferencing.