Cisco's Outlook Signals Confidence in Product Overhaul

(Bloomberg) -- Cisco Systems Inc. gave a bullish forecast for the current quarter, signaling confidence that an overhaul of its computer-networking products will continue to boost corporate demand.

The stock jumped as much as 6.8 percent in premarket trading Thursday after the company's predictions for fiscal first-quarter sales and profit topped analysts' estimates. Cisco, the maker of equipment that directs most of the world's internet data traffic, also said demand around the world and across all of its products had lifted earnings in the July quarter above average projections.

Chief Executive Officer Chuck Robbins is remaking Cisco into a provider of networking software and services, aiming to decrease its traditional dependence on high-priced custom machines. New versions of some of its existing hardware, which also require subscriptions to services, are beginning to help that corporate makeover, he said. A buoyant economy is also encouraging companies to update or enlarge their infrastructure.

“We've obviously been operating in what would be described as a pretty robust broad-based economy,” Robbins said in an interview. “On our side, I believe we have a strategy and a plan that's sustainable.”

Sales in the first quarter, which ends in October, will rise 5 percent to 7 percent from the same period a year earlier, the San Jose, California-based company said Wednesday in a statement. That indicates revenue of as much as $12.98 billion, compared with an average analyst estimate of $12.59 billion. Adjusted profit in the quarter ending in October will be 70 to 72 cents a share, the company said. Analysts predicted 69 cents, according to estimates compiled by Bloomberg.

“They're looking for 5 to 7 percent, which is arguably better than they've seen for a long time,” said Erik Suppiger, an analyst at JMP Securities. “It's good on an overall basis. It's encouraging.”

The stock traded as high as $46.95 following the earnings announcement. The shares had earlier closed at $43.86 in regular trading in New York, leaving them up 15 percent this year.

In the fourth quarter, Cisco reported higher revenue from all regions and all of its major product areas. The hardware division posted sales of $7.44 billion, up 7 percent from a year earlier. Software rose 10 percent to $1.34 billion, and security revenue gained 12 percent at $627 million. By region, the Americas, the biggest source of sales, had the slowest growth at 5 percent. Europe, Middle East and Africa sales climbed 8 percent, and Asia had 6 percent growth.

Suppiger said investors want more of the company's growth in the future to come from software and services. Growth from its hardware business, boosted by a stronger economy, is ‘‘not what we want ultimately,” he said.

Cisco reported progress in reducing its dependence on hardware, with deferred revenue from software and subscriptions increasing 23 percent to $6.1 billion in the fourth quarter.

While Cisco is plowing ahead with an attempt to turn itself into a different company -- 19 of 20 acquisitions made since the start of 2016 were software companies, according to Raymond James analyst Simon Leopold -- it still gets the majority of its income from switches and routers.

The market for those boxes -- which connect computers to form networks and link those networks to the broader internet -- is moving away from what made Cisco dominant in the industry. Customers increasingly want cheaper hardware and software that's open and programmable. Cisco, which in 1999 briefly held the title of world's most valuable company, is also trying to field new, more flexible boxes that meet those requirements.

To compensate for that shift to cheaper machinery, Cisco's new products help customers better monitor data traffic, control user access, and diagnose and fix problems. Many of them are offered as subscriptions, which tie customers to the company over a longer period.

In the three months ended July 28, Cisco reported adjusted profit of 70 cents a share, on revenue of $12.84 billion. That compares with average analyst estimates of 69 cents a share and sales of $12.8 billion. Sales rose about 6 percent from a year earlier, the third consecutive quarterly expansion. Prior to that Cisco had reported lower revenue for seven straight quarters.

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, Molly Schuetz, Andrew Pollack

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