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Cisco stock up, but sales not seen improving soon

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CIOL Bureau
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By Ben Klayman



CHICAGO: Cisco Systems Inc.'s stock surged on Wednesday after strong quarterly results, but analysts and investors warned that the networking giant's revenue will remain in a holding pattern until the economy improves. Stock in the San Jose, California-based company, which rose 11 percent in early trading, closed up 92 cents, or 7.6 percent, at $12.99 in heavy trading on the Nasdaq market, one day after Cisco posted stronger-than-expected earnings. Analysts said the report sparked hopes the U.S. economy was stabilizing.



The overall Nasdaq composite index, which initially rose 3 percent, finished up 1.7 percent. Over the last several quarters, the market has surged the morning after Cisco's earnings announcement on optimism that demand was stabilizing. Many analysts and investors, however, said revenue at the No. 1 maker of equipment that directs Internet traffic will not improve much any time soon.



"Cisco is going to find it extremely difficult, for a more protracted period of time than many investors would like to believe, to re-establish top-line growth," said Andy Schopick, vice president of research at Connecticut-based broker-dealer Nutmeg Securities, which does not own Cisco shares.



Cisco Chief Executive John Chambers on Tuesday touted the company's strong growth in U.S. corporate, or enterprise, product orders. However, he also talked about weakness in Germany, Japan and Latin America, as well as concern about further potential spending cuts in the telecommunications industry. The corporate market accounts for about 80 percent of Cisco's revenue, with telecommunications making up the rest.



Chambers said customers were still cautious about spending, and he forecast that revenue in the first quarter would be flat to slightly up from its fiscal fourth quarter ended in July.



‘People are scared to buy’


"You got a quarter as good as you can expect in this environment ... (but) people are scared to buy things and it's a bear market in technology," said Alan Loewenstein, portfolio co-manager at John Hancock Technology Fund, which owns shares in Cisco. Salomon Smith Barney analyst Alex Henderson said the quality of the results was not particularly good in several respects. "The revenues came in at the low end of the band, virtually dead flat quarter-to-quarter, despite it being a seasonally stronger quarter," he said. Henderson also cited Cisco's inability to build a backlog in the fourth quarter and a projected first-quarter book-to-bill ratio below 1.0.



Book-to-bill reflects how many orders a company gets in relation to how much it ships. A ratio above 1.0 means demand is greater than supply, while below that means the opposite. Cisco said its fourth-quarter net profit, including one-time items, was $772 million, up from $7 million last year. Excluding one-time items, Cisco earned 14 cents a share, 2 cents above analysts' expectations. Revenue rose 11.6 percent from last year to $4.83 billion, but was largely flat with the previous quarter and slightly below Wall Street's forecasts.



At least things not getting worse


"The best thing you can say about Cisco's results is that things are not getting worse," said an analyst with Morgan Stanley Asset Management who follows semiconductor companies that supply Cisco. "There's no uptick yet in business, but it is definitely not getting worse," said the analyst, who asked not to be identified. SG Cowen in a research report viewed Cisco's news as negative for its component suppliers, saying a recovery looked further out now.



Also on Tuesday, Cisco, sitting atop a cash pile of $21.5 billion, almost tripled its stock buyback program to $8 billion from $3 billion previously. Cisco's shares have fallen about 28 percent this year, compared with a 62 percent drop in the American Stock Exchange Network Index, an industry proxy.



(Additional reporting by Eric Auchard in Boston)



© Reuters

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