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Cisco Q3 Gives It an Edge

Continuing what's turning out to be a solid year of growth, Cisco Systems Inc. (Nasdaq: CSCO) reported a strong third quarter and shrugged off the rocky earnings reports of its competitors, saying it doesn't yet see signs of trouble.

For its third quarter, which ended April 29, Cisco reported net income of $1.4 billion, or 22 cents per share, on revenues of $7.3 billion, compared with net income of $1.4 billion, 22 cents per share again, on revenues of $6.6 billion the previous quarter.

For its third quarter a year ago, Cisco reported net income of $1.4 billion, which was 21 cents per share back then, on revenues of $6.2 billion.

Cisco's pro forma earnings of 29 cents per share outdid the analyst consensus of 26 cents according to Reuters Research . Cisco's stock was up 92 cents (4.2%) to $22.60 in early after-hours trading. Those gains faded as Cisco's conference call with analysts wore on, however, and the stock at one point was down 41 cents (1.9%) at $21.27.

On a conference call with analysts this evening, CEO John Chambers liked the quarter so much, he even took some time to trash talk the competition.

Chambers said that Cisco was pleased with the quarter, "especially given the slower growth some of our larger peers have been experiencing." Extreme Networks Inc. (Nasdaq: EXTR) and Foundry Networks Inc. (Nasdaq: FDRY) disappointed with their earnings reports in April, and Juniper Networks Inc. (NYSE: JNPR) puzzled investors with a glitch in some revenues from Verizon Communications Inc. (NYSE: VZ) (See Extreme Slump Continues, Foundry Scores a Near Miss, and Juniper Defends Core Business in Q1.)

Chambers admitted Cisco is concerned by the "cautious guidance" coming from its competitors, but he added that Cisco itself isn't getting more pessimistic about the future. "Our business momentum is actually increasing," he said.

"While we are clearly not immune to an industry slowdown, we are uniquely positioned in this market."

Even without Scientific-Atlanta Inc. , acquired in a deal that closed in February, Cisco saw revenues grow 12 percent from the same quarter last year. Chambers repeatedly has said he believes Cisco has the stuff to grow 10 to 15 percent per year, long-term.

Scientific-Atlanta contributed $407 million to revenues, exceeding some analysts' predictions -- Mark Sue of RBC Capital Markets had figured SA to contribute $350 million. (See Cisco/SA: The Integration Starts Now.)

Cisco's fourth quarter, ending in July, is typically its strongest. Cisco predicted fourth-quarter revenues of $7.79 billion to $8 billion -- growth of 18 to 21 percent from the previous year. Before the call, analysts were expecting fourth-quarter revenues of $7.88 billion, according to Reuters.

Cisco's healthy results come mostly from the U.S. Not only is it Cisco's largest market (North America represents about half of Cisco's sales) but it saw strong growth in the third quarter as well, Chambers said.

Cisco's U.S. service provider business saw growth in the "high 20s" compared with last year's third quarter, Chambers said. Japan, representing just 4 percent of Cisco revenues, continued to be a weak market, but with some signs of hope. "We saw meaningful sequential order improvement in orders for the first time in two years, up approximately 10 percent."

Cisco continued to trumpet the growth of its "advanced technologies," areas such as IP telephones and storage networking. Wireless did particularly well, with growth in the low to mid 30 percent range compared with the previous year.

Optical equipment continued to disappoint, though, falling approximately 20 percent from the previous year, not including any contributions from Scientific-Atlanta. Wall Street won't have optical to kick around for long -- last quarter, Cisco said it will stop reporting its optical revenues, instead adding them to the routing, switching, and "other" categories beginning in the first fiscal quarter of 2007. (See Cisco Rallies in Q2, Hides Optical.)

— Craig Matsumoto, Senior Editor, Light Reading

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