Cisco shares stung after quarterly report

Shares of Cisco Systems Inc. dropped 16.2 per cent Thursday after the company missed its internal projection for product orders by about US$500 million. According to National Bank Financial, it was the biggest closing drop for the company in 16 years.
The networking company posted gains in both profit and revenue when it announced its fiscal first quarter results on Wednesday for the period that ended Oct. 30, despite what it called “a challenging economic environment.”
However, some analysts are wondering if the Cisco results herald trouble for the enitre technology sector. Tech stock leaders including Hewlett-Packard Co., Microsoft Corp. were among those whose prices also dropped, although Intel Corp. was up.
On a conference call Wednesday to discuss the results, Cisco chair and CEO John Chambers said Cisco had run into some surprises in the quarter, including how fast government purchases fell off, but expressed confidence in the company’s overall progress.
“We’ve got a couple of air pockets that we’ve hit,” Chambers said. “This is minor bumps in terms of the direction where we’re going to head as a company.”
On the conference call, Cisco forecast revenue growth of 3 to 5 per cent for the current quarter but predicted the full fiscal year 2011, ending in July 2011, would show revenue gains between 9 and 12 per cent compared with the previous year. The company’s long-term target for quarterly revenue gains is between 12 and 17 per cent.
In the first quarter, Cisco’s revenue hit US$10.75 billion, up about 19 per cent from its US$9.02 billion a year earlier. Net income increased by 13 per cent, reaching US$1.9 billion.
Not counting certain one-time items, Cisco earned $0.42 per share, surpassing the consensus forecast of $0.40 per share by analysts surveyed by Thomson Reuters.
Budget cuts hit spending in the public sector, which typically represents 22 per cent of Cisco’s revenue, Chambers said. The impact was felt in many parts of the world, he said. In the U.S., purchases by states fell significantly while local spending fell slightly, and federal purchases grew. In the cable business, where Cisco sells the set-top boxes that consumers use to connect their TVs to cable networks, Motorola gained some market share against Cisco, the company acknowledged.
Cisco also fell short with its security products, where sales fell 2 per cent from a year earlier. Chambers said the company has been working on improving its security lineup over the past several months.
However, Chambers said business was good in Cisco’s core businesses and some critical new categories. Router revenue increased 13 per cent from a year earlier and switch revenue grew 25 per cent. In the data-centre product segment, where Cisco is challenging Hewlett-Packard Co. and other big rivals with both server and networking products, revenue jumped 59 per cent in the quarter.
The company’s UCS (Unified Computing System) server lineup logged year-over-year growth of 550 per cent, compared with a very early period in the rollout of UCS. The company now claims 2,800 customers for UCS and said more than 40 customers have bought more than US$1 million worth of UCS gear. Revenue from collaboration products rose 45 per cent in the quarter.
Chambers claimed he has seen a “tipping point” in CIOs’ views of enterprise video collaboration over the past six months. They are recognizing that video can help them improve productivity and change their business processes, he said.
Cisco also said it has added about 1,900 employees to its ranks during the quarter and has hired about 600 additional sales representatives in the past two quarters.

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