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Wednesday, September 3, 2008

Cisco Profit Climbs 4.4% on Sales Growth

Chief Sees Uncertainty Over Economy Lingering For Next Few Quarters

Cisco Systems Inc. posted a 4.4% increase in profit on sales growth of nearly 10%, bucking worries that the slowing economy would hold down demand for high-tech products.

The company, the world's biggest maker of networking hardware, indicated sales growth is likely to slow in the next two quarters.

John Chambers, Cisco's chief executive, predicted that economic uncertainty will remain for the next few quarters. As a result, the company -- which usually offers a 12-month forecast -- only offered financial guidance for the next two fiscal quarters. Cisco projected revenue growth in the current period in the range of 8%, and fiscal second-quarter growth of about 8.5%.

Mr. Chambers said he isn't changing the company's long-term forecast for growth in the range of 12% to 17%. "Our confidence in our longterm revenue growth remains the same," he said during a conference call with analysts.

Analysts have been waiting for Cisco's numbers for signs that economic woes are spreading. In the past few years, when corporate customers have reduced spending on networking gear, the impact on Cisco has tended to be offset by rising Internet traffic that prompted cable and telephone companies to buy more hardware.

Credit Suisse analyst Paul Silverstein said in a recent report that AT&T Inc. and other telephone companies are trimming their 2008 spending budgets, which he predicts will hurt Cisco. The expected spending cutbacks led Mr. Silverstein to downgrade the networking company's stock from "buy" to "neutral."

Mr. Chambers was among the first high-tech executives to acknowledge a looming slowdown, warning in late 2007 that U.S. spending on networking might be "lumpy" for much of this year. In early July, Mr. Chambers fueled further jitters by suggesting that Cisco may not see an upturn in corporate technology spending until early next year.

To offset some of the pullback, Cisco has broadened its product line beyond an original speciality in switching and routing devices. The company has been among the most aggressive acquirers in the high tech industry, assembling engineers and programmers from start-ups to push further into markets such as social networking, online video and conferencing.

In the latest quarter, Cisco's business in switches and routers posted 5% growth and 8% growth, respectively. The two product categories, which account for nearly 60% of Cisco's overall revenue, have usually grown at percentage growth rates in the mid-teens. Still, the 5% growth for switches is a slight improvement on the 3% growth rate in the fiscal third quarter.

For the quarter ended July 26, the San Jose, Calif., company reported net income of $2.01 billion, or 33 cents a share, compared with $1.93 billion, or 31 cents a share, in the year-earlier quarter.

Revenue rose to $10.4 billion from $9.4 billion. Cisco did particularly well in emerging markets, with revenue growth of 42% compared to 5% in the North American market.

By: Bobby White
Wall Street Journal; August 6, 2008