Cisco's Revenue and Profit Spike in Q3

IDG News Service (San Francisco Bureau) — Cisco Systems on Tuesday reported strong growth in revenue and profit for a fiscal third quarter in which it made several acquisitions that it expects to help power Web 2.0.

The dominant network vendor's revenue rose to US$8.9 billion for the quarter, up 21 percent from the same quarter a year earlier. Net income grew almost 34 percent to $1.9 billion, for earnings per share of $0.30, on a generally accepted accounting principles (GAAP) basis.

Excluding certain items, net income was $2.1 billion or $0.34 per share, beating the consensus forecast of analysts polled by Thomson Financial by $0.01 per share and more than $100 million of revenue on a non-GAAP basis.

During the quarter, which ended April 28, Cisco acquired online collaboration vendor WebEx Communications for $3.2 billion and also bought social networking technology developer Five Across and some assets of Utah Street Networks, another social networking company.

Chairman and CEO John Chambers raved about the quarter on a conference call following the earnings announcement.

"Q1, Q2 and Q3 were unusually strong quarters," Chambers said. Cisco said the good times would continue, forecasting revenue of $9.2 billion to $9.3 billion in the fourth quarter, up between 15 percent and 16 percent from a year earlier.

Product order growth was strong across almost all regions and products, except for continued weakness in Japan and flat results in the U.S. enterprise equipment market. Web 2.0, which Cisco described as including unified communications, collaboration, blogs and other features, is driving network upgrades, the company said.

"The second phase of the Internet ... will drive the industry for the next decade," Chambers said.

The company's CRS-1 (Carrier Routing System) flagship router for carrier core networks was a highlight, with sales of almost $250 million in the quarter, driven partly by the growth of video traffic. Sales at Cisco's Scientific-Atlanta subsidiary also soared as service providers equipped their customers with high-definition set-top boxes and digital video recorders.

Emerging markets continued to stand out, with average product order growth around 40 percent overall and 50 percent increases in both Eastern Europe and India. Cisco expects spending in Japan to take off late this year or in early 2008 when carriers there start building their next-generation networks. Most enterprises in the United States are being conservative about investing in networks, including new technology such as unified communications and Cisco's high-end Telepresence virtual conferencing systems, executives said.

Cisco plans to expand its software business in the next fiscal year, following on from its acquisition of WebEx and taking advantage of changes in the way business processes are delivered, said Senior Vice President and Chief Development Officer Charles Giancarlo.

"Cisco is really a software company wrapped up in steel clothing," with 65 percent of its engineers working on software, Giancarlo said.

In after-hours trading on Tuesday, Cisco shares on Nasdaq (CSCO) were down $1.64 at $26.72 after rising strongly over the past week.