Cisco Gains Give Way

After disappointing guidance, the stock pulls back more than 2% after an early postclose runup.
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Updated from 4:45 p.m.

Cisco

(CSCO) - Get Report

shares dropped 2% late Wednesday after the tech titan offered disappointing earnings guidance and spoke of a salesforce hiring spree.

The late selloff reversed an early after-hours gain that took root after the networking nonpareil matched Wall Street estimates with a 10% revenue gain.

For its fiscal first quarter ended Oct. 29, the San Jose, Calif., networking giant made $1.26 billion, or 20 cents a share. A year ago, Cisco made $1.4 billion, or 21 cents a share. Revenue rose to $6.55 billion from $5.97 billion a year earlier.

On a pro forma basis, excluding certain costs, latest-quarter earnings were 25 cents a share. Analysts were expecting Cisco to make 24 cents a share on sales of $6.57 billion, according to a Thomson First Call tally.

"Q1 was a solid quarter for Cisco, with balanced execution across most of our geographies, market segments and product categories," said CEO John Chambers. "We are especially pleased with the improving business momentum in the U.S. and Asia Pacific, the strength of our product families and the accelerated growth of the commercial marketplace, which has become our fastest growing customer segment."

Cisco's cash flow in the fiscal first quarter was $1.4 billion, but the company's cash pile shrank sharply from $16.1 billion in the prior quarter to $13.5 billion. A large chunk of the money went to stock buybacks. In the quarter ended last month, Cisco repurchased $3.5 billion in stock.

On a postclose conference call, though, Chambers said its book-to-bill ratio -- reflecting the amount of orders booked for each dollar of sales -- was slightly below 1. Investors often take a number below 1 as a bearish sign on coming quarters.

Cisco hired 849 new employees in the most recent quarter, taking its total head count to 39,262. Chambers said later that Cisco would continue hiring in the second quarter, with an emphasis on sales people.

The news comes as Cisco tries to shake off Wall Street's growth worries by pushing aggressively into new markets.

In the past three years, Cisco has made huge productivity gains and key product acquisitions. It has a stronger global reach and has broadened its range of customers. In short, the company has managed to strengthen and stabilize its business in a sluggish spending climate. Yet Cisco also has become very predictable, and the slow-and-steady routine wins few fans on Wall Street.

On the conference call with analysts Wednesday, Cisco reiterated that full year sales growth would be about 11%. In the current second quarter, Cisco guided for revenue to be flat to slightly up from the first quarter and up about 8.5% over the year-ago period. Executives also targeted gross margins at 67%, down from the 68.5% in the first quarter. Analysts were looking for 2% sequential revenue growth in the second quarter.

Chambers explained that though the current quarter's top-line growth projection is down below the full year target, the remainder of the year should pick up. The company will have "a better second half of the year," he said.

In regular trading Wednesday, Cisco slipped 11 cents to $17.75. In late action, it fell 30 cents to $17.45.