Balaraja blog

Cisco sales beat Street but margin disappoints

NEW YORK (Reuters) – Network equipment maker Cisco Systems Inc's weaker quarterly margins seemed to confirm investors' fears that growing competition may be forcing the company to cut prices to protect market share.

Shares of Cisco fell more than 7 percent after Cisco Chief Executive John Chambers failed to reassure investors that public sector spending, a major source of concern in prior quarters, would improve. It could weaken in the next few quarters, he said.

On a conference call with investors, Cisco said orders from government agencies, whose weakness had stunned Wall Street late last year, had improved by 7 percent in the quarter.

RBC analyst Mark Sue said the company's gross margin of 62.4 percent was a disappointment. The market had expected a number closer to 63 percent, he said.

"The results were a little bit better than expected on the top line and also better on the bottom with some help from a better tax rate," he said. "However, investors are looking at the gross margins, which declined sequentially."

Cisco's fiscal second-quarter revenue rose 6 percent from a year earlier to $10.41 billion. Analysts had expected $10.23 billion in quarterly revenue, according to Thomson Reuters I/B/E/S.

The company's net profit for the quarter ended January 29 fell to $1.5 billion from $1.9 billion a year earlier. Excluding items, its earnings per share was 37 cents, beating the market's average forecast of 35 cents and the company's own forecast of 32-35 cents.

Cisco forecast revenue in its fiscal third and fourth quarters within range of Wall Street estimates, failing to pull its shares higher.

The company expects revenue for the current third quarter to rise by 4 to 6 percent. It sees fourth-quarter revenue growing 8 to 11 percent. Wall Street analysts estimate 5 percent growth for the third quarter and an 8 percent rise for the fourth.

Cisco is considered one of the sector's prime bellwethers due to the breadth of its customer base which ranges from small U.S. businesses to foreign governments. Also, its last quarter ended in January rather than December like most of its peers, making its results a more up-to-date indicator of technology spending.

(Reporting by Ritsuko Ando; Editing by Richard Chang)