Cisco Slides After Forecasts Miss Most Optimistic Views

(Bloomberg) -- Cisco Systems Inc. shares slipped after the network-equipment maker’s fourth-quarter forecasts fell short of Wall Street’s most optimistic projections.

Before the company provided its outlook for the current period, the stock had surged 32 percent in a year, last week reaching the highest price in more than 17 years. While Cisco said it’s optimistic about demand and predicted a third straight period of sales growth, some investors had been betting on a faster acceleration. The shares fell almost 4 percent to $43.44 at 9:38 a.m. in New York.

Cisco still relies on hardware for more than half of its revenue, and it’s posted sales growth in only two of the past nine quarters. Chief Executive Officer Chuck Robbins has been working to make the company less dependent on the market for expensive equipment by making its hardware more flexible and selling more networking services and software. For now, increased spending on networking gear is buoying Cisco’s main business, buying more time for its increasing backlog of deferred software and services revenue to translate into more sustained sales growth.

“The strategy we laid out three years ago is working,” Robbins said. “We’re pleased we did what we said we were going to do.”

Cisco’s new business model will deliver faster revenue growth when the company makes additional progress moving traditional switching and routing customers over to products that carry software subscriptions, he said. In general, Cisco is as optimistic about global demand as it has been "in a very long time," Robbins said.

Revenue in the current period will rise 4 percent to 6 percent from a year earlier, the San Jose, California-based company said Wednesday in a statement. That indicates sales of $12.6 billion to $12.9 billion, compared with an average analyst prediction of $12.7 billion. Adjusted profit in the quarter ending in July will be 68 cents to 70 cents a share, while analysts had projected 69 cents.

In the third quarter, which ended April 28, Cisco said net income climbed to $2.69 billion, or 56 cents a share. Sales climbed 4.4 percent to $12.5 billion. Excluding certain items, profit was 66 cents a share. That compares with average analyst projections for profit of 65 cents a share on revenue of $12.4 billion, according to data compiled by Bloomberg.

The technology of networks is increasingly shifting toward software-based data-flow controls and away from fixed-purpose hardware. That’s providing some of the largest users of networking -- owners of data centers such as Amazon.com Inc.’s Amazon Web Services and Microsoft Corp.’s Azure -- with the ability to design and build their own gear. Cisco is responding by coming up with cheaper and more flexible products that are aimed at meeting the new needs.

Cisco’s Catalyst 9000 switch product is helping it turn around sales of hardware to companies. The new box, part of a range that connects computers together into networks, also includes a software subscription, helping Cisco to pull in more revenue even after selling it, according to Raymond James & Co. analyst Simon Leopold.

Demand has continued to be weak from customers who are video-service providers, and for routers, the machines that connect networks to each other -- and that isn’t expected to improve in the current period, Chief Financial Officer Kelly Kramer told analysts on a conference call. Switches and routers are the two biggest hardware products for Cisco.

Sales in the infrastructure platforms division, which includes Cisco’s main switch and router businesses, gained 2 percent to $7.2 billion in the third quarter. Revenue from applications, the company’s software and teleconferencing products unit, increased 19 percent to $1.3 billion. Security-related sales rose 11 percent to $583 million.

Deferred revenue in the form of recurring software and subscriptions was up 29 percent from a year earlier at $5.6 billion. Executives point to this metric as the key indicator of Cisco’s future performance and progress toward becoming less reliant on hardware.

Cisco also said it began a restructuring plan in the third quarter that would result in an estimated charge of $300 million for severance, other one-time benefits and associated costs. The company called the restructuring “narrow in scope,” and declined to provide further details.

--With assistance from Brandon Kochkodin.

To contact the reporter on this story: Ian King in San Francisco at ianking@bloomberg.net

To contact the editors responsible for this story: Jillian Ward at jward56@bloomberg.net, Andrew Pollack

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