Updated from Nov. 5
surged past Wall Street's earnings expectations Wednesday and goosed its guidance, igniting a rally in its shares and adding fuel to the tech bounceback story.
The networking giant maintained its fat gross margins in the fiscal first quarter despite a move into consumer electronics. Cisco also chronicled an expanding commitment to stock buybacks and forecast a sequential revenue increase for the second quarter. Its shares rose 6% early Thursday.
"Our revenue guidance is up slightly," CEO John Chambers said, pointing toward an expected 2% revenue gain for the second quarter vs. first-quarter levels. He said the company is seeing "very cautious increases in business capital spending."
Beyond that, Chambers sounded typically optimistic, if vague, on a postclose conference call. He said he continues to see signs of a rise in capital spending from the big companies that are Cisco's main customers. "The recovery appears to be slowly gaining momentum but is still fragile in the minds of our customers," he added.
Still, by some lights the second-quarter guidance felt lukewarm, particularly considering the apparent strength of the first quarter. In part, observers fear that Cisco's brief revenue-growth streak may be in jeopardy, portending a return to bottom-line-only success.
"Now it appears that the earnings numbers will come from cost control," says Blaylock Partners analyst Gabriel Lowy, who has a hold rating on the stock. Lowy says the conservative guidance is actually a very telling statement about customer whims and the impact of an anticipated slowdown in federal government spending this quarter.
Cisco jumped $1.30 Thursday morning to $23.10, a 52-week high.
For the fiscal first quarter ended Oct. 25, the San Jose, Calif.-based networking giant posted earnings of $1.09 billion, or 15 cents a share, on revenue of $5.1 billion. A year ago, the networker posted earnings of $618 million, or 8 cents a share, on sales of $4.85 billion. On a pro forma basis, excluding certain costs, earnings in the latest quarter were 17 cents a share. Wall Street analysts had forecast latest-quarter earnings per share of 15 cents on sales of $4.8 billion.
Chambers' comments on the call indicate Cisco expects second-quarter revenue of around $5.2 billion, which is well above the $5 billion Wall Street consensus estimate. The company expects to post gross margin in the 68% range for that period, which is roughly in line with what observers were expecting.
Chambers said the company's first-quarter gross margin dropped to 68.7% from 69% in the fourth quarter, a drop that was in line with analysts' expectations. Financial chief Dennis Powell attributed the slight decline to sales at the company's newly acquired Linksys home-networking division. Operating expenses rose in the latest quarter as a result of the low-margin Linksys sales and the weakening dollar, Powell said.
Cisco said Linksys posted first-quarter revenue of $119 million and trimmed the company's gross margin by 1%. But that reduction didn't hurt pro forma earnings, the company said on the call.
The Linksys numbers have been an issue because so much attention has been focused on Cisco's gross margin. Cisco has maintained gravity-defying gross margins in the 70% range on its network gear throughout the downturn, but the company has recently made efforts, such as the Linksys buy, to expand its product line in an effort to grab some sales growth. Analysts have worried that in jump-starting its top line, the company will compromise its lush profitability, but Chambers' comments appear to have allayed those fears for now.
Also of note is Cisco's share-buyback progress. The company has managed to boost earnings per share during a three-year-long period of mostly flat sales and profits by aggressively buying in stock. But some observers have begun wondering whether investors really benefit from that use of the company's massive cash hoard. Cisco has been using much of its cash flow in recent periods to offset employee option exercises, a trend that intensified in the latest period with stock buybacks substantially exceeding cash flow.
Chambers said Cisco spent $2 billion in the first quarter on stock buybacks, doubling its $1 billion in cash flow for the period. As a result, the company had $19.7 billion in cash at Oct. 25.
The company has repeatedly reiterated its stock-buyback commitment in recent months, and CFO Powell indicated Cisco fully intends to make good on those plans. The company has now bought back $9.8 billion in stock since the repurchases started in the fall of 2001, and $10.2 billion worth remains outstanding on the board's authority. "We intend to be active in the market," Powell said.
That in mind, the buyback market appears likely to be the only market Cisco is truly active in in coming months. Chambers said he isn't likely to do a big deal of the type that consolidation-minded black helicopter types have long advocated, in which Cisco snaps up a big if troubled communications-gear rival, on the thinking that big deals don't work well. On the other hand, Cisco will probably continue to sniff around for smaller transactions, he indicated.
Search for Tomorrow
The report comes as tech investors continue to search for signs that corporate information-technology spending is set to stage a long-anticipated recovery. Outfits like Cisco and router-making rival
have rallied sharply in recent months as the economy has begun to show signs of strength. Wall Street expects the companies to be among the first beneficiaries of any uptick in tech spending.
Cisco is especially closely watched because the company was long one of Silicon Valley's most luminous success stories. The company posted heady growth throughout the 1990s, coming of age just as big businesses started wiring up their internal computer networks in earnest. But since the tech boom collapsed in 2000, Cisco has been running in place, posting solid profitability but failing to give investors the revenue growth they crave.
To that end, Chambers had some promising if ambiguous remarks on the call Wednesday. Service providers' orders rose 10% sequentially in the latest quarter, the executive said. Chambers added that it's "hard to say if it continues, but it could be an interesting start."
Chambers also said on the call that business leaders he's spoken to increasingly sense that they have "the wind at their backs." Cisco investors know the feeling.