Aug. 10 (Bloomberg) -- Cisco Systems Inc., the world’s largest maker of networking equipment, reported profit that beat analysts’ estimates as the company reined in expenses while refocusing on its high-margin routers and switches.
Excluding some costs, profit was 40 cents a share in the fiscal fourth quarter, Cisco said today in a statement. Analysts had predicted 38 cents on average, according to Bloomberg data. Sales rose 3.3 percent to $11.2 billion in the period, which ended July 30, compared with an estimate of $11 billion. Shares jumped in late trading.
Chief Executive Officer John Chambers is slimming down the company amid slowing customer spending and increased competition from Juniper Networks Inc. and Hewlett-Packard Co. Cisco has fired workers and closed its Flip video camera unit to concentrate on its main networking products. The cost cutting is beginning to pay off, even as sales grow relatively slowly, said Colin Gillis, an analyst at BGC Partners in New York.
“You’ve got good cost controls on the earnings,” he said. “It’s a company that’s going to be driving earnings twice as fast as revenue.”
Sales will grow 1 percent to 4 percent in the current quarter, Chambers said on a conference call. That equates to as much as $11.2 billion. Analysts had predicted $10.9 billion.
Shares Gain
Cisco rose as much as $1.76, or 13 percent, to $15.49 in extended trading after the report. The shares, down 32 percent this year, had closed at $13.73 on the Nasdaq Stock Market.
Net income fell to $1.23 billion, or 22 cents a share, from $1.94 billion, or 33 cents, a year earlier, the San Jose, California-based company said. Cisco’s previously announced reorganization expenses weighed on profit in the period.
Gross margin, the percentage of profit left after subtracting production costs, was 62.7 percent last quarter. The company had forecast 62 percent.
Standard & Poor’s downgraded the U.S. credit rating to AA+ from AAA last week, roiling stock markets. That had raised concerns that technology spending will suffer. Central banks are trying to prevent a new recession, with Federal Reserve Chairman Ben S. Bernanke vowing yesterday to keep borrowing costs at an all-time low to revive a recovery that’s “considerably slower” than expected.
Job Cuts
As part of a plan to reduce costs by $1 billion next year, Cisco said July 18 that it would eliminate 6,500 workers through firings and an early retirement program. It also sold a factory in Mexico. Cisco recorded pretax restructuring costs and other charges of $772 million last quarter.
“While I wish we had never had to go through this, it clearly was time for a fundamental change at Cisco,” Chambers said today on the call. “I feel very confident about Q1 in terms of what we can control and influence and we have built some conservatism into it.”
Cisco is making the cuts as rivals gain market share in both routing and switching, which combined made up half of the company’s revenue last year. Cisco’s share of worldwide switching revenue dropped 5.8 percentage points to 68.5 percent, and its share of router sales dropped 6.4 percentage points to 54.2 percent, according to a May report from Dell’Oro Group. Hewlett-Packard gained switching share, while Juniper added share in the router market.
Cisco’s results are seen as a bellwether for the technology industry because its switches and routers dominate the market. Organizations buy the switches to direct Internet traffic on their networks, while phone and internet-service providers rely on the company’s routers.
“Even in a weak economy, there’s strong demand for Cisco’s products,” Gillis said. “They’re right smack in the middle of the growth of the Internet.”
--With assistance by Ari Levy in San Francisco, and Stephen Kirkland and Rita Nazareth in New York. Editors: Nick Turner, Tom Giles.To contact the reporter on this story: Zachary Tracer in New York at ztracer1@bloomberg.net
To contact the editor responsible for this story: Tom Giles at tgiles5@bloomberg.net
Source: Business Week
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