Cisco Hits the Spot

Updated from Feb. 6.

Cisco (CSCO) surged 4.5% early Wednesday after the company raised sales guidance for the third quarter.

The San Jose, Calif., Internet gearmaker made $1.9 billion, or 31 cents a share, for the fiscal second quarter ended Jan. 27, up from the year-ago $1.4 billion, or 22 cents a share. Revenue rose 27% from a year ago to $8.44 billion.

On an adjusted basis, excluding certain costs, earnings were 33 cents a share in the latest quarter. Analysts surveyed by Thomson Financial were looking for a 31-cent profit on sales of $8.28 billion.

"I believe we are gaining market share against all our competitors," CEO John Chambers said on an earnings call Tuesday. "Key takeaway from quarter two is that momentum remains strong."

Chambers also raised sales growth guidance for the current fiscal third quarter to between 19% and 20%. Wall Street had been looking for 15% growth. Chambers left long term annual revenue growth guidance unchanged at between 10% and 15%.

Cisco expects third-quarter sales of between $8.7 billion to $8.8 billion, finance chief Dennis Powell said. Analysts were looking for $8.56 billion, according to Reuters Research. Gross margins will be in the 64.5% range for the quarter, the company said.

For the fiscal fourth quarter, Cisco says sales will be somewhere between $9 billion and $9.3 billion.

"Balance continued to be very good," says Chambers, referring to the order growth among the company's various businesses in various regions.

He said the company's closely watched book-to-bill ratio, measuring the proportion of orders to shipments, was above 1 in the latest quarter -- generally a bullish sign.

Set-top box maker Scientific-Atlanta, acquired during the third quarter of fiscal 2006, contributed net sales of $639 million during the second quarter of fiscal 2007.

Cash flows from operations rose to $2.7 billion from $1.9 billion a year earlier. Cash on hand rose to $20.7 billion from $19.5 billion at the end of the previous quarter, even as Cisco spent $3.3 billion to buy back 121 million shares.

"The quarter looks pretty solid," said one money manager who holds Cisco shares. "The only thing I can see immediately is that the share count increased by 92 million, not the 50 million they guided to."

That rise comes as Cisco shares have staged a furious rally over the last six months following Chambers' rosy outlook revision back in August. The stock, long stuck in the midteens, surged into the high 20s, cresting last month just shy of $29. The rally likely put some Cisco option holders back in the money for the first time in years.

Shares rose $1.22 early Wednesday to $28.50.

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