Cisco Beats Q1 In Latest Sign Of Tech Bounce

• J. Bonasia
• On 6:49 pm EST, Wednesday November 4, 2009

Investors looking to technology barometer Cisco Systems for signs of a spending rebound got just that Wednesday as the networking gear giant beat quarterly sales and profit targets and issued a bullish forecast.

Cisco (NasdaqGS:CSCO - News) earned 36 cents a share excluding special items for its first quarter, which ended Oct. 24. That's down 14% from a year ago but well above the Wall Street consensus estimate of 31 cents.

Cisco's sales fell 13% from a year earlier to $9 billion, but that was about 3% above analyst forecasts. In August, Cisco had forecast a 15% to 17% decline in sales for the first quarter, a seasonally weak period.

"We are starting to see solid indications of economic recovery in most regions around the world," Cisco CEO John Chambers said in a conference call discussing the earnings news. "We are seeing tangible results showing that the recovery, at least the start of the recovery, is showing momentum."

It's the latest in a string of positive earnings news from technology companies. Cisco shares, which have risen 40% this year, jumped 3% in after-hours trading.

Sales Trends Improve

Sales for the San Jose, Calif., firm have risen sequentially for two straight quarters. Last quarter, Chambers said Cisco had likely passed the worst of the recession.

For the current quarter, Chambers expects sales to grow 1% to 4% vs. a year earlier -- its first annual rise in four quarters. Wall Street expects a 1% drop.

Microsoft (NasdaqGS:MSFT - News), Intel (NasdaqGS:INTC - News) and storage giant EMC (NYSE:EMC - News) have all beat quarterly estimates in recent weeks. IBM (NYSE:IBM - News) reported results in line with estimates.

Cisco, the market leader in computer network gear, is the first large tech firm to report earnings that include October sales.

Betting on a rebound, Cisco on Tuesday announced plans to partner with EMC and VMware (NYSE:VMW - News), a maker of virtualization software, to jointly build new data centers. That alliance was forged to take on IBM and Hewlett-Packard (NYSE:HPQ - News) for control of data centers that power corporate networks and Web sites.

Avian Securities' Catharine Trebnick says the pact is a good strategy for the trio to align their sales forces and pursue new contracts in a tough market.

"It's still a pretty tight environment, and you have to fight for deals," she said. "This sales collaboration is their attempt to capture new revenue."

Some sources from high-tech supply chains indicate that "momentum has continued through the December quarter" and those contacts are "optimistic on spending trends for 2010," according to analyst Brian White of Ticonderoga Securities.

"Despite already improved sentiment surrounding trends at Cisco, we believe demand trends at the company and new initiatives can move the stock higher," White wrote in a note to investors. He rates the stock a buy.

A recovery is "by no means robust," but rising estimates "bode positively" for Cisco, said Simon Leopold of Morgan Keegan. He rates the stock as outperform or buy.

"We think elements of a macro recovery and pent-up demand position Cisco to deliver improving growth trends," Leopold wrote in a research note. "Cisco can not only weather the downturn, it can come out stronger."

Spending by large companies and government agencies has improved in North America, according to Leopold. Yet he says trends in Europe and emerging markets are still struggling.

The U.S. economy grew 3.5% in the recent third quarter, but jobs and housing data remain weak.

"The slow pace of an economic recovery and increasing unemployment remain significant head winds," Leopold wrote. "The macro picture still looks tough."

Cisco has announced several acquisitions in recent weeks, including plans to buy Norwegian videoconferencing firm Tandberg for $3 billion and wireless gear maker Starent Networks (NasdaqGS:STAR - News) for $2.9 billion.

Cisco also said it will buy ScanSafe, a Web security firm. Earlier this year, Cisco bought Pure Digital, maker of the Flip video camera.

Checks with tech buyers show that spending is improving modestly, Trebnick said, adding that Cisco's push into video systems "will play a key role in driving long-term profitable growth."

Despite Cisco's recent purchases, the company holds a net cash balance of $35.4 billion. Analysts say Cisco must acquire to grow, though the sheer number of mergers has dampened margins.

Buzz up!