Cisco Surges to Highest in 17 Years on Bullish Earnings Outlook

Ian King (Bloomberg) -- Cisco Systems Inc. surged to a 17-year high in early trading Thursday after the maker of machinery that carries most of the world’s internet data gave a bullish forecast for sales and profit.

“We’ve really re-energized the core networking business,” Chief Executive Officer Chuck Robbins said in an interview. “Clearly the economy is encouraging. There’s a lot of optimism.”

Robbins is reducing Cisco’s reliance on the shrinking market for high-priced hardware and pivoting to software and services that manage and protect networks. New products that are better suited to the changing needs of customers, plus a stronger economy, are boosting orders, Robbins said. 

Revenue in the current period will climb as much as 5 percent from a year earlier, the San Jose, California-based company said Wednesday in a statement. That indicates sales as high as $12.5 billion, compared with an average analyst estimate of $12.1 billion. Adjusted profit in the quarter ending in April will be as much as 66 cents a share, the company said. Analysts projected 63 cents.

Cisco’s “return to growth is no longer on the horizon -- it has arrived,” Paul Silverstein, an analyst at Cowen & Co. wrote in a note to investors. He said the company’s outlook for third-quarter revenue growth implies “significant acceleration.”

The shares jumped as much as 7.8 percent to $45.36 in early trading in New York. The stock hasn’t traded above $45 since December 2000.

Demand for switches and routers may be rising as corporations upgrade older equipment. Cisco’s new products help customers better monitor data traffic, control user access, and diagnosis and fix problems.

“It’s been a long time coming,” said  Simon Leopold, an analyst at Raymond James & Associates. “A lot of the legacy footprint is out of date. You can only hold your breath for so long.”

Cisco is one of the richest companies in the technology industry. It has more than $70 billion in cash, most of which was earned overseas and parked there. The company will now bring back some of that money and devote an additional $25 billion to buying back stock. Cisco took a charge of $11.1 billion related to new tax laws, leading to a net loss of $1.78 a share in the second quarter. Excluding some items, it reported a profit of 63 cents a share, beating analysts’ estimates for 59 cents.

Sales rose for the first time in eight quarters to $11.9 billion in the three months ended Jan. 27, also coming in ahead of estimates.

Robbins is seeking to restore the growth that once made Cisco the biggest company in technology. It’s a challenge amid a fundamental change in the networking industry that’s forcing Cisco to acquire new skills and adapt its business model. The technology of networks is increasingly shifting to software control and security of data flow and away from fixed-purpose hardware. At the same time, some of the largest buyers of gear -- owners of data centers such as Amazon.com Inc.’s Amazon Web Services and Microsoft Corp.’s Azure -- are increasingly designing their own hardware forcing Cisco to come up with new, cheaper and more flexible products that might interest them.

Product Breakdown

Infrastructure platforms, which includes Cisco’s main switch and router businesses, had sales of $6.7 billion, up 2 percent from a year earlier. Applications, its software and teleconferencing products unit, increased 6 percent to $1.2 billion. Security-related sales rose 6 percent to $558 million.

Deferred revenue in the form of recurring software and subscriptions was up 36 percent from a year earlier at $5.5 billion. Executives point to that as the key indicator of its future performance and progress toward becoming less reliant on hardware.