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Cisco’s Upbeat Forecast Signals Strong Corporate Spending

Ian King
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Cisco’s Upbeat Forecast Signals Strong Corporate Spending

(Bloomberg) -- Cisco Systems Inc. gave a bullish sales and profit forecast for the current period, a sign that corporations continue to spend on their computer networks despite concern that a trade dispute between China and the U.S. will slow global economic growth.

Sales in the fiscal fourth quarter will increase 4.5% to 6.5% from the same period a year earlier, the San Jose, California-based company said Wednesday in a statement. That indicates revenue of as much as $13.5 billion, compared with analysts’ average estimate of $13.29 billion. Adjusted profit will be 80 to 82 cents a share, in line with projections for 81 cents.

Cisco shares were up 3.5% in pre-market trading at 4:36 a.m. in New York Thursday. The stock, which has gained more than 20% this year, increased less than 1% to $52.44 at Wednesday’s close in New York.

Cisco, whose equipment makes up the backbone of the internet and corporate networks, has returned to growth by revamping existing products and adding new software and services under a corporate makeover by Chief Executive Officer Chuck Robbins. The company’s forecast may help defuse concerns that companies are becoming less willing to invest in new hardware amid fears about tariffs on trade between the world’s two largest economies.

Cisco’s outlook takes into account the possibility that the U.S. will follow up on its threat to levy a 25% tariff on a variety of goods made in China, Robbins said.

“We’re proud of what the teams have achieved in a very complex world, but it will remain a complex world,” the CEO said in telephone interview. The company has experience in moving its manufacturing locations and has done the work needed to mitigate the impact of a tariff hike, he said.

Cisco said orders are increasing, particularly from security unit customers, because of the work done over the last two years to revamp its products. That has made the offerings a better fit for the more complicated networking and computing needs of corporations, which are using a mix of in-house networks and outsourcing, Robbins said.

In the fiscal third quarter, which ended April 27, net income rose to $3.04 billion, or 69 cents a share, from $2.69 billion, or 56 cents, a year earlier. Revenue climbed to $13 billion. Excluding certain items, Cisco posted profit of 78 cents a share, compared with the average analyst estimate of 77 cents, according to data compiled by Bloomberg.

By region, the Americas led the way in the quarter with a 9% gain in sales from a year ago, excluding a divested business, to $7.7 billion. Europe was also up, rising 5%. Cisco’s security business revenue jumped 21% from a year earlier to $707 million. Hardware grew 5% and software expanded 9%.

Cisco’s status as the biggest maker of routers, switches and other gear used to connect computers means its earnings are seen as a broad indicator of corporate spending plans. The company gets only a tiny percentage of sales from China, where it’s been largely locked out of the market, and in one way may be a beneficiary of the ongoing trade dispute, which includes U.S. government attempts to block purchases of equipment from one of its biggest rivals, Huawei Technologies Co. Still, if business spending is hindered by an overall economic slowdown caused by trade uncertainty, Cisco’s sales could feel a hit, analysts have said.

Cisco has "greatly reduced" its exposure to manufacturing in China, said Chief Financial Officer Kelly Kramer on an analyst call, and that it is "trying to mitigate" any impact.

Under Robbins, Cisco has made a string of acquisitions aimed at bringing in software and services that will ease the company’s dependence on hardware. He’s trying to build more predictable, recurring revenue by offering customers the ability to remotely manage and monitor their networks in order to make them more efficient and secure.

Cisco’s leader has said that transformation will take time as many of the new offerings require customers to shift to newer hardware that will support advanced functions and services.

(Updates with shares, added 11th paragraph.)

To contact the reporter on this story: Ian King in San Francisco at ianking@bloomberg.net

To contact the editors responsible for this story: Jillian Ward at jward56@bloomberg.net, Andrew Pollack

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