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Red-Hot Cisco Warms Tech

Shares rise after another upbeat conference call.

Cisco (CSCO) - Get Cisco Systems, Inc. Report shares led the market higher Wednesday as the tech giant remained optimistic.

The San Jose, Calif., networking-gear maker posted fiscal

second-quarter results late Tuesday, beating analysts' estimates. The company also predicted sales for the current quarter would grow as much as 20% over year-ago levels -- well above the 15% pace the Street anticipated.

The strong performance across a range of products in nearly all regions helped confirm CEO John Chambers' observations in November that the Cisco engine was "firing on all cylinders."

Industry observers say that Cisco's dominance of the Internet-equipment market is paying off as network operators worldwide spend on expansion to keep up with rising traffic volume.

A big part of the Net capacity consumption is the growth of video, which Chambers called the "killer application" on a conference call with analysts Tuesday.

Analysts say businesses continue to gear up to handle more data, and presumably bandwidth hogging events like teleconferences. Cable companies like

Comcast

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are undertaking a whole

new round of upgrades to deliver advanced video services, including high-definition TV. And phone companies are investing in plans to distribute video over a whole new Internet pathway called IPTV.

"We are in a very good spot," said Cisco chief accounting officer John Chadwick, referring to central supplier role Cisco enjoys.

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"The cable industry in general is going great guns working on the adoption of new services like video on demand," says Chadwick. He said Cisco sees cable companies "deploying aggressively in anticipation" of the phone companies' introduction of Internet protocol TV.

But all the growth in Cisco's video unit, Scientific-Atlanta, has been a slight drag on gross margins, critics note. Cisco said Tuesday that due to the higher mix of video gear in the total sales, gross margins will likely shrink to 64.5% from the 65% previously predicted.

Unlike Cisco, which largely outsources its manufacturing to Asian electronics assembly partners, Scientific-Atlanta still makes most of its own set-top cable boxes in Mexico.

"They have a tried and tested manufacturing model," says Chadwick, explaining the inherent differences in production costs and hence the margin impact.

On the ongoing legal battle with

Apple

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over the iPhone name, Chadwick says both sides have decided to hold off for a while.

Apple

introduced its hotly anticipated iPhone last month, apparently without gaining full approval from Cisco, which contends it has held the trademark for seven years.

"We are open to joint usage or joint marketing agreements" with Apple, says Chadwick, who sees an opportunity for interoperable products down the road between Apple and Cisco.

For Apple, it's a name for a phone, says Chadwick. But for Cisco, he adds, "it's bigger" -- more like a whole platform of products.

Cisco shares rose $1.14 to $28.42 in midday trading Wednesday.