Cisco's profit margin fails to impress

The networking powerhouse beats analyst expectations, but executives say that challenges still exist.

By Kim Peterson Nov 10, 2010 6:31PM
Shares of Cisco Systems (CSCO) have had the blahs for months now, and investors were hoping the networking giant's first-quarter report Wednesday would snap that streak.

No deal. Shares plummeted nearly 14% in after-hours trading as executives spoke of numerous business challenges. Cisco squeaked by fairly modest Wall Street expectations on profit and sales, but gross margin was lower than what some analysts wanted to see.

The company also disappointed investors with its forecast for the current quarter. Analysts had been expecting revenue of $11.1 billion, but executives pointed to revenue in the $10.1 billion to $10.3 billion range.

Is the market overreacting here? The quarter might have been a little choppy, but Cisco was still able to grab $1.9 billion in profit, or 34 cents a share -- an 8% gain from the $1.8 billion, or 30 cents a share, a year earlier. After removing one-time charges, profit came in at 42 cents -- 2 cents higher than Wall Street was expecting.

Revenue was $10.75 billion, up 19% from $9.02 billion in the year-ago period. Analysts were expecting sales of $10.74 billion. Cisco had previously forecast revenue between $10.65 billion and $10.83 billion.

One area that didn't come through was gross margin performance, which was 62.8% in the quarter. Analysts were looking for something along the lines of 64%, Bloomberg reported.

Wall Street closely watches Cisco's earnings. The tech bellweather can rattle or cheer the market with its results, and in the previous quarter's call, chief executive John Chambers spooked investors by talking about "mixed signals" and saying that business leaders were becoming more cautious. Shares dropped about 10% in response.

This time, Chambers repeatedly used the word "challenges" to frame the climate. The biggest challenges, he said, were in the public sector and service provider areas as well as in European capital spending. Post continues after video:
"Cisco will always be affected by major economic changes," he told analysts in a conference call.

For the current quarter, Cisco said it expected revenue growth of 3% to 5% year-over-year. For the full year, revenue growth should be between 9% and 12%. The company expected operating margins to be in the range of 23% to 25%, and per-share earnings at between 32 and 35 cents.

Even as the economy remains sluggish, Cisco is expanding into areas that put it in competition with entirely new players. The company's new focus on blade servers have made it a rival of former partner Hewlett-Packard (HPQ).

And Cisco continues to move into the consumer businesses. It bought the popular Flip video camera last year for nearly $600 million in stock.

Soon, Cisco will debut the $599 Umi, a camera that plugs into your television and lets you hold video conferences online. Umi also comes with a $25 monthly service fee -- which critics have railed against for making the system too costly.

Chambers said the company saw strong growth in the quarter in the collaboration and business videoconferencing areas. And its newer initiatives, including virtual healthcare and virtual education, are off to a good start.

He said he feels good about Cisco's ability to move into new markets. "Will we make mistakes along the way? Of course we will," he said. "Otherwise we are not taking enough good business risk."

2Comments
Nov 11, 2010 1:15AM
avatar
Poor little Cisco. They only made 10 Billion instead of 11 Billion.   With all those Billions of dollars in the bank why don't they hire a few people and do something for this economy.   Also for us americans who don't have a job.   Maybe their company would do better.
Nov 10, 2010 8:15PM
avatar
Here we go again. Who appointed CISCO (Chambers) as a proxy for the Tech sector? They sell hi-end network components which represent less than 10% of the consumer and enterprise network architecture.  CISCO, Chamber's predictions for the tech sector were totally wrong last quarter and they're wrong this quarter.  Apple, AT&T and BestBuy are good consumer tech barometers and IBM, Intel and Microsoft are good enterprise barometers.  CISCO is a contrarians delight that the bears and short love to use to create volatility and trading opportunities for options.  CISCO sucks.  The .com bubble is over.
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