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Optical/IP

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

Pete Baldwin 12/5/2012 | 3:54:29 AM
re: Cisco Q3 Gives It an Edge Some analysts seem miffed by Cisco's guidance -- on the call, they're asking why, if everything is going so well in terms of orders, the guidance isn't blowout. "That's about as optimistic as we get in the positioning," is how Chambers put it.

Part of cisco's mistake might have been a warning that fiscal Q1 is always worse than Q4 -- they're getting questions about why they mentioned that. Chambers keeps saying the company sees no overall slowing-down of the industry.

But if anyone's got other interpretations, please share ...
ExAlcy 12/5/2012 | 3:54:28 AM
re: Cisco Q3 Gives It an Edge They said 15-18% for Q406. That is above last quarter guidance - not softer. If you really do listen closely, you understand Alex Henderson just didn't get it. Chamber's said Q107 with have the same seasonal effects as usual - meaning Q4 has historically been better that Q1 and Q406 to Q107 shall be no different. It seemed obvious.
Honestly 12/5/2012 | 3:54:28 AM
re: Cisco Q3 Gives It an Edge CRS revenue, not enough to move my needle and if you listen to the replay of the call listen carefully to Alex Henderson's question on guidence. Chambers could, would not reply with an honest response. Next QTR may be a bit softer. With this strong QTR Cisco shows they are a very solid company, but NOT a growth company. Even John cannot sell that spin. Stock should rally, but don't invest the farm as the $100 days are long gone.
Good QTR Cisco.
slayer666 12/5/2012 | 3:54:28 AM
re: Cisco Q3 Gives It an Edge Perhaps Cisco should just stop giving guidance...Analysts are just stroking their egos by asking the "tough questions", in an attempt to justify their bloated salaries and perhaps their existence.

If Cisco predicts a blow-out quarter and miss, these guys will shoot off the "I told ya so", an drive the stock down.

These are the same people who drove the bubble, or have we forgotten that already?
geof hollingsworth 12/5/2012 | 3:54:28 AM
re: Cisco Q3 Gives It an Edge Market didn't seem to like it. Traded up as the initial release went out (I think I saw prices as high as 22.80), but as the concall and Q&A progressed it slid back down to around 21.40 (lower than the closing price). All of this on tiny trades relative to "real" investors, however. We'll see what the morning brings.....
slideruler 12/5/2012 | 3:54:27 AM
re: Cisco Q3 Gives It an Edge Craig -
I don't think it's a mistake to state an obvious seaonality of the business cycle - stating otherwise on an analyst call will not make this structural element of the telecom sales cycle simply go away. Please do not apply for an Investor Relations position in the near future.

The rest of this call was as would be expected - anybody who has ever experienced a Cisco analyst call or meeting before would recognize this.

Besides - the market is down on the Sector, not Cisco.

Bottom line: who wouldn't love to have this company's fundamentals - huge CAP, great acquisition currency AND 15%+ growth? "Not a growth company"? Uh, right. Just because the market doesn't crank out inflated stock valuations (GOOG foolishness notwithstanding)of 100x or 200x earnings, doesn't make this a stock non-growth. Who would you rather be (or own): Juniper? Lucatel? Nortel?

Uh huh.

SR.
Steve0616 12/5/2012 | 3:54:25 AM
re: Cisco Q3 Gives It an Edge UPOD makes the most sense with these analysts.
Honestly 12/5/2012 | 3:54:24 AM
re: Cisco Q3 Gives It an Edge You should do your homework. Despite the upbeat posture, management guided revenue to the pre-call July quarter consensus estimate GĒō i.e. in line. As anticipated, CiscoGĒÖs bullish qualitative comments could not be matched with upside guidance and the stock price reflects that today.
Thanks.
materialgirl 12/5/2012 | 3:54:21 AM
re: Cisco Q3 Gives It an Edge Dear Craig:
CSCO analysts are annoyed because of John C.'s double-speak. He leads them along with talk of 20%-range "order growth" that a) is not a GAAP number and b) never seems to turn into actual revenues. What a surprise.

During the call, analysts did the math, and it seems as though Q1 ests (for October) for revenue growth are at about 10%. Given that "order" growth has been outpacing actual revenue growth for some quarters, and the book-to-bill number over one implies this gap is growing, at some point revenue growth should pick UP, not sag.

When ever management starts focusing on non-GAAP numbers, I smell a rat. Therefore, this gap does not surprise me, but apparently other analysts have swallowed it hook, line, and sinker and now are starting to see it does not add up. This is costing them credibility and their customers money. That is why they are angry.
BlueFox 12/5/2012 | 3:54:13 AM
re: Cisco Q3 Gives It an Edge Their is a reason why ANAL is part of their job title. It fits their personality and contribution to society.
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