Cisco stock jumps on strong earnings

NEW YORK (CNNMoney.com) -- Cisco Systems, the leading maker of gear that connects computers to the Internet, reported earnings and sales that beat analysts' estimates and issued bullish guidance for its current quarter, giving hope to investors that corporate tech spending will show strength in 2007.

Shares of Cisco (Charts) surged 4.5 percent in after-hours trading Tuesday after closing down 0.8 percent in regular trading on the Nasdaq.

Cisco's sales came in at a record $8.4 billion, compared to projections of $8.28 billion, according to analyst estimates compiled by Thomson Financial. This marked a gain of 27 percent over the year-ago quarter.

The San Jose-based company reported fiscal second-quarter net income of $1.9 billion, or 31 cents per share, up 40 percent from the same period last year.

Excluding certain one-time items, Cisco reported earnings of 33 cents per share, up 27 percent from a year ago, and ahead of the 31 cent per share profit analysts were expecting on this basis.

"We are obviously very pleased with the growth on both the top and bottom lines this quarter," said John Chambers, Cisco's chief executive officer, on the earnings call.

Chambers added during the call that Cisco expects its sales for its fiscal third quarter to increase 19 percent to 20 percent. Analysts had been expecting growth of 17 percent.

"One concern was that inventory was a little higher than usual," said Shaw Wu, analyst with American Technology Research. "But they are projecting higher revenues over next two quarters, so it isn't as big of a deal. You see more business, you need more inventory."

All of Cisco's divisions showed year-over-year growth in the quarter, with the crucial Router division growing substantially.

"Routing was really strong, up 18 percent, especially high-end systems," said Wu. "When you sell more high-end systems, it tends to pull the rest of the business up. If I had to say anything negative, the switching division was a bit lighter than expected, down 1 percent sequentially. But the growth in routing more than made up for it."

Cisco, in addition to making switches and routers for large corporate customers, has been increasingly moving into consumer equipment like cable set-top boxes and wireless routers for home networks.

The company acquired cable box maker Scientific-Atlanta last year and Cisco said that the cable equipment company contributed net sales of $639 million during the quarter, up 23 percent from the year-ago period.

Cash-flush Cisco said it holds cash and investments of $20.7 billion at the end of the quarter, up from $19.5 billion at the end of the first quarter of fiscal 2007, and $17.8 billion at the end of the fourth quarter of fiscal 2006.

Investors had high hopes for Cisco because increasing Internet bandwidth needs, caused by greater video usage, are expected to spur network equipment spending.

"Video continued to drive network demand this quarter and is potentially the killer app. in the future," said Chambers.

He also remarked that the company's outlook looked bright for the long term.

"As the network becomes the platform, we are seeing more and more signs that all forms of [information technology] and communication are moving into the network and increasing the total available market to Cisco," he said in the written earnings statement.

Investors are looking closely at the results to get a reading on the health of corporate technology spending. Tech companies have seen mixed results in the latest round of earnings, with investors disappointed by results from AMD (Charts), IBM (Charts) and Intel (Charts).

Cisco's shares have gained nearly 60 percent in the last six months.

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