Cisco beats forecasts, recovery under way

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By Ritsuko Ando

NEW YORK (Reuters) - Cisco Systems Inc posted a stronger-than-expected profit for its fiscal first quarter and said business was recovering as customers are buying more network equipment again after cutting back for the past year.

Chief Executive John Chambers' revenue forecast for the current quarter also exceeded Wall Street expectations, helping the shares rise 3.7 percent after-hours on Wednesday. He also said business conditions likely hit bottom in the early part of this year, its fiscal third quarter.

"There will be a good chance we will look back to see that Q3 was in fact the bottom, that Q4 was the tipping point, and the recovery started aggressively in Q1 of fiscal '10," he said.

Cisco is the world's top vendor of routers, switches and other network equipment used by global businesses, including telephone companies, as well as governments.

Many of those customers had put off large investment over the past year as tighter credit and an uncertain economic outlook made it hard for them to invest in big ticket items like high-end routers. Cisco's CRS-1 router, for example, costs around $500,000 to $1 million each.

But Chambers said many were beginning to invest again to cope with growing Internet traffic, which Cisco has forecast to grow fivefold from 2008 to 2013. The U.S. government's stimulus package is also helping, he said.

Revenue in the fiscal first quarter, which ended October 24, fell 13 percent from a year earlier to $9 billion. But that was up 6 percent quarter on quarter and higher than the average Wall Street forecast of $8.7 billion, according to Thomson Reuters I/B/E/S.

The company forecast fiscal second quarter revenue would increase by 1 percent to 4 percent from a year earlier, or a rise of 2 percent to 5 percent compared with the first quarter. The average Wall Street estimate for the second quarter had implied a revenue decline of 1.3 percent year on year.

Chambers said the company was now looking to hire more workers as business picks up and it looks to gain market share against rivals like Juniper Networks Inc and Alcatel-Lucent .

Cisco's board also authorized up to $10 billion in additional share repurchases.

SLIGHT CAUTION

Chambers, however, was wary of commenting beyond the current quarter, saying the economy was still volatile.

"So, we're more optimistic than most of our peers ... but our approach is, let's look at more data before we get too optimistic," he told Reuters in an interview.

Jefferies & Co analyst Bill Choi said the caution made sense.

"In the near term, we have a lot of visibility, but no one is going to stick their neck out for 2010. Corporate budgets are being set just as we speak, or just close to getting done," Choi said.

Chambers said that for now, he sees the market recovering, and that another quarter or two of improvement could help him gain confidence in making longer-term forecasts.

First-quarter net profit was $1.8 billion, or 30 cents a share, compared with $2.2 billion, or 37 cents a share, a year earlier. Excluding items, profit was 36 cents a share, higher than the average Wall Street forecast of 31 cents.

TANDBERG DOUBTS

Cisco has recently stepped up its pace of acquisitions, aiming to expand further from its traditional focus on routers and switches to a broader range of products and services, including videoconferencing and business software.

Since October, Cisco has announced plans to buy Norwegian video conferencing company Tandberg ASA for $3 billion, as well as a $2.9 billion deal for wireless equipment maker Starent Networks Corp .

It is unclear whether the Tandberg deal will close as some investors are demanding a higher offer, and Cisco said it was still negotiating with shareholders.

"I believe we will get this transaction closed," Chambers said, but added Cisco has walked away from deals before and that it was already offering a healthy premium.

"There's no acquisition that is a must have," he said.

Chambers said Cisco will step up investments in new and "adjacent markets" -- businesses those that are related to, and can bolster sales of, existing products. Videoconferencing, for example, can help drive sales of routers and switches as high-resolution Web videos require advanced network gear.

This aggressive M&A strategy has helped Cisco grow from a company with annual revenue of around $40 billion from slightly above $1 billion when Chambers became CEO in 1995.

Cisco shares rose to $24.15 in after-hours trading from their Nasdaq close of $23.29. The stock has risen more than 40 percent since the start of the year.

(Additional reporting by Ian Sherr and Caroline Valetkevitch; editing by Bernard Orr, Tiffany Wu and Andre Grenon)

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