NEW YORK (CNN/Money) -
Cisco Systems, the largest maker of computer networking equipment, reported a 50 percent jump in net income for the latest quarter Tuesday despite a drop in sales, and the company warned that sales could fall again this quarter.
Cisco said its fiscal second-quarter net income was $990 million, or 14 cents a share, and earnings excluding certain items were 15 cents a share. Analysts were expecting earnings excluding items of 13 cents a share, up from 9 cents a year ago, according to earnings tracker First Call. Sales fell to $4.7 billion, in line with expectations, from $4.8 billion a year ago.
But during the company's conference call Tuesday afternoon, Cisco lowered its sales guidance for the fiscal third quarter, which ends in April. Cisco CEO John Chambers said sales likely will be flat to down about 3 percent from the second quarter, which implies a range of about $4.6 billion to $4.7 billion. Analysts were expecting sales of $4.8 billion.
The company did not discuss its earnings target for the fiscal third quarter. The current consensus estimate is 13 cents a share.
There was little reaction to Cisco's report on Wall Street though. Cisco (CSCO: Research, Estimates) shares were unchanged on Wednesday, closing at $13.20.
It's a show-me economy
Chambers was cautious when discussing the demand outlook going forward. "From a global CEO and government leader perspective, we remain in a 'show-me' economy," Chambers said in a statement.
Hammering this point home, Chambers used the term "show-me economy" four times during the company's conference call. Chambers also said many of its customers were more cautious in January than they were in November and December due to the continued economic malaise and geopolitical concerns. What's more, the company's fiscal third quarter is typically the weakest from a seasonal perspective.
The San Jose, Calif.-based company has said in recent quarters that the corporate technology spending environment isn't improving, but that it has been able to hold up better than its competitors due to cost-cutting and market share gains.
To that end, gross margins, a key measure of how well a company is wringing profits from its sales before operating expenses, came in at 70.4 percent in Cisco's second fiscal quarter, ended in January, above the most optimistic forecasts on Wall Street. During the conference call, Cisco CFO Larry Carter said gross margins for the fiscal third quarter would be between 68 and 70 percent.
Wall Street not thrilled
But Michael Davies, an analyst with Caris & Co., a research boutique that does no investment banking, said the decline in sales from the prior quarter was a bit of a letdown. Cisco had told Wall Street it expected sales to be in a range of flat to 5 percent lower than fiscal first-quarter revenue of $4.8 billion.
Davies said the report was clean and further proof of how Cisco has been able to weather the storm in a tough market. But he said the market is hoping to hear strong guidance for the next few quarters. "Investors want to see something that tells us we're out of the woods here," he said.
Jay Wong, co-manager of the Payden U.S. Growth Leaders fund, which owns Cisco shares, said he was mildly disappointed with the company's sales outlook. "Cisco has said that the networking business will pick up as the economy picks up. But that's the million-dollar question, and the answer remains unknown," he said.
Another negative aspect about the quarter was that Cisco's book-to-bill ratio was below 1, Pacific Growth Equities analyst Erik Suppiger said. This means that the dollar amount of orders for products in the quarter was lower than the dollar amount of actual shipments, another indication of slack demand. Suppiger said he was expecting the book-to-bill ratio to be above 1. He does not own shares of Cisco and his firm has no investment banking relationship with the company.
Despite this uncertainty, Chambers said Cisco still is well-positioned to benefit from a recovery in the economy, even though he would not predict when the recovery might take place. Another factor bolstering Cisco is its strong balance sheet, with no debt and with cash and investments of $21.2 billion, unchanged from the previous quarter.
The size of Cisco's cash hoard has caused some investors to call for the company to begin paying a dividend. Chambers said the company would never rule out a dividend but pointed out that investors voted against a dividend proposal in November. A more likely use for its cash would be more stock buybacks. Cisco repurchased about $1.5 billion worth of its stock in the fiscal second quarter.
Chambers also said the company would continue to invest heavily in higher growth areas such as optical networking, security and storage – with 40 percent of its research and development budget allocated toward these areas. Cisco still derives an overwhelming majority (67 percent) of its revenue from sales of routers and switches.
And success in these newer growth markets will be key as core business starts to mature.
"The long-term growth rates in switching and routing are not very compelling," Suppiger said.