August 5, 2008 / 8:53 PM / 9 years ago

UPDATE 5-Cisco profit beats view, affirms long-term outlook

(Adds analyst comments)

By Ritsuko Ando

NEW YORK, Aug 5 (Reuters) - Cisco Systems Inc (CSCO.O) posted stronger-than-expected quarterly results and said it expected the weak economic environment to be relatively short term, sending its shares up 7 percent after the market closed on Tuesday.

Investors took heart from Chief Executive John Chambers’ comment that he had “very strong” confidence in Cisco’s long- term revenue growth target of 12 percent to 17 percent, even though the company’s quarterly forecasts were a little light compared with average analyst estimates.

“Despite concerns of deterioration in its core market, Cisco reiterated its long term growth guidance, giving jittery investors some comfort,” said Mark Sue, an analyst at RBC Capital Markets. “A lot of people were worried that the number would have to come down.”

Cisco, which sells routers and switches that direct Web traffic, has benefited as global phone companies and large corporations upgrade their networks to meet growing Internet use, but investors have been worried that a weaker economy could weigh on technology spending.

Its profit for the fiscal fourth quarter ended July 26 rose to $2.0 billion, or 33 cents a share, from $1.9 billion, or 31 cents a share, in the year-ago quarter. Earnings excluding items rose was 40 cents per share, exceeding the average analyst forecast by a penny, according to Reuters Estimates.

Quarterly revenue rose 9.9 percent to $10.4 billion, surpassing $10 billion for the first time. Analysts on average had expected revenue of $10.3 billion.

Analysts said they were particularly happy with Cisco’s announcement that book to bill ratio, was “comfortably over” 1, indicating a healthy balance of demand to supply.

While the veteran technology executive avoided giving a full-year outlook for the fiscal year that just began, only giving an outlook for the first two quarters which were slightly below estimates, analysts said they were happy with what they got.

Cisco forecast revenue growth of 8 percent in the first quarter and 8.5 percent in the second quarter. Wall Street on average was looking for first quarter revenue growth of 8.8 percent and second quarter of 9.5 percent.

“It might have been worse that,” said Jefferies analyst Bill Choi. “If anything, it gives people confidence that off this low Q1 number they are anticipating a sequential rise.”

Chambers also said he saw mixed signals in the economy, stock market and energy costs, but that the challenges would be relatively short term.

“While it is very difficult to predict when we may see a stronger spending environment by our customers and return to our 12 percent to 17 percent long-term growth objectives, our best estimate... is that the current economic challenges remain with us for the next few quarters,” he said.

While those comments may have seemed extremely cautious a few quarters ago, analysts said Wall Street had already factored in a few more quarters of weak business activity.

Chambers spooked the market last month when he told Reuters that more customers saw an economic recovery early next year rather than this year and similar comments elicited little reaction on Tuesday.

Analysts said they were also encouraged by Chambers’ remarks that its U.S. enterprise business was showing improvement.

Cisco shares were up 7 percent at $24.24 in extended trading, after gaining 3 percent in Nasdaq trading to close at $22.65.

As of Tuesday’s close, the shares had fallen over 20 percent from a year earlier. RBC Capital Markets has a 12-month price target of $27 while Jefferies targets $30.

Chambers said Cisco will always be affected by economic changes, but that it will manage to grow in the long term, regardless.

“During each economic slowdown, Cisco has always navigated through them very effectively gained wallet share and in my opinion market share,” he said.

Analysts have also said Cisco was relatively resistant to economic downturns because it has broadened its customer base, as well as its product line and geographic reach.

While it is best known for selling routers and switches, it has expanded into software and new technologies such as video conferencing.

It said on Tuesday that orders from emerging markets excluding Asia grew around 10 percent in the July quarter, whereas orders in the United States and Canada grew 7 percent. European orders grew 11 percent. (Additional reporting by Sinead Carew; Editing by Andre Grenon)

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