U.S. News

Cisco Profit Surges, But Shares Drop on Slow U.S. Orders


Cisco Systems' fiscal third-quarter profit surged 34%, but investors punished the stock on signs of weakness for the second straight quarter in a core area of the company's business.

Cisco shares plunged Wednesday , even though the results released after the markets closed Tuesday narrowly beat Wall Street's expectations.

San Jose-based Cisco said net income for the three months ended April 28 was $1.87 billion, or 30 cents a share, compared with $1.4 billion, or 22 cents a share, during the same period last year.

Cisco Systems Q3 Net Profit Up 34%
Cisco Systems Q3 Net Profit Up 34%

"This was a record quarter … we're above our growth projections both in fact and in the numbers, and we gained market share in most all product categories," Cisco CEO John Chambers said in an interview with CNBC's "Asia SquawkBox."

Excluding one-time charges, the company earned 34 cents a share, a penny higher than the average estimate by analysts surveyed by Thomson Financial, as widespread networking upgrades and consumers' thirst for more bandwidth continued to fuel the company's robust growth.

Cisco, the world's largest provider of the routers and switches for directing data traffic over computer networks, rang up $8.87 in billion in sales during the quarter, including a $752 million boost from cable television box seller Scientific-Atlanta.

Revenue grew 21% over last year and topped the $8.76 billion that analysts were expecting.

Management is bullish that the appetite for its networking gear will continue to drive long-term growth as more tools are needed to manage booming Internet traffic.

"We are more optimistic about our expectations than we've been for some time," Dennis Powell, Cisco's chief financial officer, told The Associated Press. "And we believe that we're going to continue to see solid growth on a global basis."

But the report disappointed investors hoping for more from the tech bellwether.

Cisco's stock closed up 55 cents, or nearly 2%, to $28.36 during the regular session Tuesday. The stock, which had climbed 8% in the last month, plunged $1.64 to $26.72 after the results were released.

Cisco has profited from hearty demand for its products as more people come online worldwide and bandwidth-intensive multimedia downloads suck up more network capacity.

However, some financial analysts have expressed fears about Cisco's ability to maintain its rapid expansion.

While sales in most segments are growing in the double digits, a sudden slowdown in orders from U.S. businesses has spooked investors.

Cisco's U.S. enterprise segment grew 20% in the first three months of the fiscal year but has since contracted to mid-single-digit growth.

Investors are unsure whether the sluggishness portends a looming deceleration in other markets or an isolated downturn. Cisco counters that the segment comprises just 13% of overall revenues, dwarfed by faster-growing foreign markets that make up more than half of the company's business.

"Today we truly are a global company operating in a global economy," Powell said.

John Slack, equity analyst with Morningstar, said Cisco posted a solid quarter and has enough breadth to offset weakness in one area with expansion in others. He said the stock fell victim Tuesday to overeager investors who have run up the stock price and expected higher guidance.

Cisco said it expects sales to grow 15% to 16% in the fourth quarter to $9.2 billion to $9.3 billion. Analysts were expecting $9.33 billion.

The company is expecting gross margins to remain flat at about 64.5%.

"These guys continue to execute, execute, execute," Slack said. "But this is a case where Wall Street's expectations had been running up in the past few weeks. It's a typical sell on the news thing. I don't expect much downside from here."