Cisco Call Shines Through

CEO Chambers sees momentum, but guidance is unchanged.
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Updated from 4:08 p.m.

Cisco

(CSCO) - Get Report

rose 5% in late trading after making positive comments on order trends and leaving third-quarter guidance intact.

For the quarter ended Jan. 28, the San Jose, Calif., router king made $1.38 billion, or 22 cents a share, compared with $1.4 billion, or 21 cents a share a year earlier. On a so-called adjusted basis, excluding stock compensation and other costs, Cisco made 26 cents a share in the latest quarter, beating the 25-cent Thomson First Call analyst consensus estimate. Sales matched targets at $6.63 billion, up 9.3% from a year earlier.

CEO John Chambers sketched out an unexpectedly bright picture in the opening moments of a postclose conference call with analysts. "Orders grew in the midteens, higher than we expected," said Chambers. "Momentum in orders makes us comfortable that we are winning against our competitors."

The second-quarter book-to-bill ratio, comparing the value of orders to the value of product shipped, was above one, said CFO Dennis Powell. A reading above one is a bullish sign, some investors believe.

At the beginning of its fiscal year in August, Cisco started adding customer orders to its performance measurements and its guidance in addition to revenue. Company executives say the order information helps investor get a better look at the health of the business.

The orders were driven by big demand in the U.S., though Japan continued to be weak, Chambers said. Referring to so-called linearity, comparing demand by the month, Chambers said that "orders gained momentum over the three months."

That comment came as music to investors' ears, accelerating Cisco's postclose run-up. After rising modestly on the release of the earnings, Cisco shot up on Chambers' ordering comments. The stock held those gains after Chambers maintained third-quarter guidance.

"In the third we anticipate product order growth of between 10% and 15%," said Chambers. Overall, he added, revenue growth should be up 10% to 12% year-over-year and sequentially up about 2.5%. That points to revenue of $6.8 billion to $6.9 billion, broadly in line with the Wall Street analyst consensus estimate calling for third-quarter revenue of $6.9 billion.

Investors should expect about 67% gross margins in the second half of the fiscal year, said Powell.

"Given all the reports that came before them, one thing you can say is that they didn't mess up the quarter," says CIBC analyst Steve Kamman, who has a buy rating on the stock.

Indeed, Cisco's solid report comes on the heels of earnings setbacks across tech, ranging from

Google

(GOOG) - Get Report

and

Intel

(INTC) - Get Report

to router rival

Juniper

(JNPR) - Get Report

.

Asked if the company is turning a corner, Chambers says there are signs of progress. "A lot of big bets we made," says Chambers, referring to technology acquisitions like security, "look like they are going to play out well."

Cisco added 400 employees to the payroll last quarter, with most of the people going into the sales organization, Chambers told listeners on the call.

Days sales outstanding in accounts receivable rose to 35 days from 31 days at the end of the fourth quarter and 33 days at the end of the first quarter.

Inventory turns on a GAAP basis were 6.5 in the second quarter, compared with 6.6 in the fourth quarter and 6.5 in the first quarter.

Cash flows from operations rose to $1.9 billion from $1.8 billion a year ago and $1.4 billion for the first quarter.

"Our second-quarter results demonstrate solid financial execution and profitable growth," said Powell.

During the second quarter, Cisco spent $748 million buying back 42 million shares at an average price of $17.87 per share. As of Jan. 28, Cisco had repurchased and retired 1.7 billion shares at an average price of $18.13.

The buyback pace has slowed down, though. Last quarter, for example, Cisco

spent $3.5 billion on buybacks.. The slowdown comes as Cisco prepares to

whip out the plastic for its purchase of set-top boxmaker

Scientific-Atlanta

(SFA)

.

In response to the buyback slowdown, the company's cash balance rose after a steady buyback-fueled decline. Cash and cash equivalents and investments were $15 billion at the end of the second quarter, compared with $16.1 billion at the end of the fourth quarter and $13.5 billion at the end of the first quarter.

Cisco expects to close the SFA deal at the midpoint of the current quarter. The revenue contribution from SFA will be about $250 million in the current quarter and about $525 million in the fiscal fourth quarter. On the bottom line, Cisco expects adjusted income from SFA will be neutral to slightly net positive in the next two quarters.

Addressing a question about the contribution of the SFA products to Cisco's business, Chambers sees some upside.

"We are getting into service provider accounts that we haven't been in before," says Chambers. Similarly, SFA sales are getting into Cisco's customers as the technologies converge. Chambers says these are the benefits of the "spillover" as entertainment traffic gets carried on the networks built with Cisco gear.

Late Tuesday, Cisco rose 88 cents to $18.97.