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Cisco Shares Pare Gains on Worries of Weak Orders

CNBC.com with Wires
Wednesday, 7 May 2008 | 8:39 AM ET

Cisco Systems saw its shares slip in premarket trading Wednesday, a day after the company reported earnings that were better than expected but did not ease analyst concerns that slowing orders would pressure the company's stock.

Cisco Systems
Paul Sakuma
Cisco Systems

Cisco said growth in Internet traffic supported sales of network equipment despite concerns of a slowing U.S. economy. Shares fell 0.72 percent to $26.33 with an hour left before the start of regular trading.

Citi Investment Research analyst Paul Mansky said order growth is slowing down, which indicates that Cisco's recovery from economic concerns may be slower than investors were hoping. As a result, he thinks the stock will give up some of its gains from recent weeks.

Mansky, who has a "Buy" rating on the stock, said comparisons will get easier in the second half of 2008, and Cisco's results will improve. He increased his price target to $31 per share from $27.

The maker of computer networking equipment reported earnings of 38 cents a share on revenue of $9.8 billion in its fiscal third quarter, excluding one-time items, compared with a profit of 34 cents a share on sales of $8.886 billion last year.

A consensus estimate compiled by Thomson Financial put earnings at 36 cents a share and sales at $9.75 billion. Analysts' estimates typically exclude one-time items.

Cisco also said on a conference call with analysts that it was comfortable with its long-term revenue growth target of 12 percent to 17 percent.

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Chief Executive John Chambers, considered a trend reader for the overall U.S. technology industry, said conditions were still challenging and that a market recovery is not in sight.

"We're continuing to see our US and some European customers remain cautious in their views about their own economies," he told analysts.

Including an acquisition-related charge of 4 cents a share, Cisco said its quarterly net profit for the fiscal third quarter fell to $1.8 billion, or 29 cents a share, from $1.9 billion, or 30 cents a share, in the year-ago quarter.

"Thirty eight cents is a couple of pennies better than I was looking for and revenue was very slightly better than I was looking for," said Signal Hill Group Analyst Erik Suppiger. "My sense is they're probably seeing some level of stabilization versus incremental slowing in the past quarters, but it's really preliminary to be making that call."

Cisco said cash flow from operations totaled $3 billion in the latest quarter, up from $2.4 billion in the same period a year earlier. Days sales outstanding for the quarter came in at 39 days while inventory turns on a GAAP basis were 11.0 for the period. Non-GAAP inventory turns were 10.7 in the quarter.

The company also noted that it bought back 83 million shares of its common stock in the third quarter at an average price of $24.04 per share, spending a total of $2 billion. As of April 26, the company's remaining repurchase authorization amount was $9.8 billion.

Chief Financial Officer Frank Calderoni also urged Wall Street to "model on the conservative side due to macro-economic challenges," after forecasting 9 percent to 10 percent revenue growth for the current quarter.

The largest maker of telecommunications equipment, Cisco is always a bellwether for the technology sector. It said U.S. orders growth was in the mid single digit percent for the quarter, while European orders rose 14 percent and emerging markets orders grew around 10 percent.

"It's a good solid report relative to expectations and relative to the macro environment going in. Cisco's good at executing, but it can't be all that bad if it's beating numbers," Mark McKechnie, analyst at American Technology Research.

Analysts pointed to strong demand from global telecommunications service providers, though they remained cautious over the strength of U.S. enterprise spending.

"We will continue to monitor closely any spread of the U.S. challenges to other geographies," Chambers said.

- Wire services contributed to this report.

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