Cisco Tops Earnings Forecasts but Profit Margins Disappoint

Cisco Systemsreported financial results Wednesday that topped expectations, but investors punished shares after hours as weaker margins added to concerns about increasing competition.

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AP

Cisco, which sells computer networking equipment to businesses, earned 37 cents a share excluding special items in its fiscal second quarter, against 40 cents a share last year. The company's net profit for the quarter ending Jan. 29 fell to $1.5 billion from $1.9 billion.

The company garnered sales of $10.4 billion in the quarter. This time last year, Cisco reported sales of $9.815 billion.

On average, analysts who follow Cisco were looking for 35 cents a share on revenue of $10.23 billion, according to Thomson Reuters. Cisco itself had provided a forecast of 32 to 35 cents a share for the quarter.

Despite seeing Cisco beat expectations, investors pushed its shares more than 9 percent lower in extended trading. Get after-hour quotes for Cisco here.

"The results were a little bit better than expected on the top line and also better on the bottom, with some help from a better tax rate. However, investors are looking at the gross margins, which declined sequentially," said Mark Sue, an analyst with RBC.

Sue said investors were looking for a gross margin figure close to 63 percent. Cisco said its gross margin for the quarter stood at 62.4 percent.

He also noted that day sales outstanding, or the amount of time Cisco requires customers to pay their bills, had increased to 40 days from 38 days.

"It may mean that Cisco is trying to extend better terms to its customers as it tries to protect its market share," Sue said.

Looking forward Cisco said it expects third-quarter sales up between 4 percent and 6 percent from a year ago, and sees fourth-quarter revenue rising between 8 percent and 11 percent.

Cisco is considered one of the sector's prime bellwethers due to the breadth of its customer base, ranging from small U.S. businesses to foreign governments. Also, its last quarter ended in January rather than December like most of its peers, making its results a more up-to-date indicator of technology spending.

Cisco shares finished Wednesday's regular Nasdaq session a hair higher on volume exceeding 94 million shares.