Cisco sees signs of a turnaround

NEW YORK (CNNMoney.com) -- Cisco Systems Inc. on Wednesday reported a drop in quarterly profit and sales from a year ago, but the network equipment maker said parts of its business are beginning to turn around.

"For the first time in many quarters, many of our global customers are describing business momentum and seeing stabilization," said Cisco Chief Executive John Chambers on a conference call with analysts. "We are going to be very aggressive this year to position ourselves for the eventual upturn."

Chambers cautioned that economic headwinds would continue to pressure the company, but he said he is encouraged by customers' renewed optimism. He said the company has "a very bright future" ahead.

For the current quarter, Chambers said sales would fall another 17% to 20%, compared with the 20% drop analysts are predicting, according to a consensus estimate compiled by Thomson Reuters.

Shares of Cisco (CSCO, Fortune 500) rose about 3% in after-hours trading.

Profit and sales tumble: The San Jose, Calif.-based network equipment maker said net income fell to $1.3 billion, or 23 cents per share, in its third quarter ended April 25, compared with $1.8 billion, or 29 cents a share, in the year-earlier quarter.

Excluding one-time charges for acquisition costs, Cisco earned 30 cents per share. Analysts, who typically exclude one-time items from their estimates, forecasted earnings of 25 cents per share.

Sales slid to $8.2 billion, narrowly topping analysts' forecasts of $8.1 billion. Revenue from the company's services actually rose 9.4%, but its product sales slumped 21.7%.

Cisco's gross margin as a percentage of net sales edged up modestly, rising to 64.1% from 64% a year ago.

Surviving the downturn. Cisco maintains a strong cash position, with $7.4 billion on its balance sheet.

To keep its capital base strong, Cisco said in February it would trim 1,500 to 2,000 employees as part of a cost-cutting campaign that would slash about $1.5 billion in operating expenses by the end of the company's fiscal year in July.

Cisco reaffirmed those job cuts Wednesday, saying headcount was down by 760 employees quarter-over-quarter, and it expected the previously-announced layoffs to be in the higher range of its forecast.

The company's stock is up 19% so far this year and 26% since its last quarterly results announcement in February as investors anticipate better days ahead.

"The fact is, the internal signs of health were definitely stronger than expected," said Ed Zabitsky, analyst with ACI research "They did a general house cleaning, doing absolutely everything to make sure they will survive this downturn."

During the quarter, Cisco increased its quarter-over-quarter cash position by more than $3 billion and scaled down its inventories 7.5% from the prior quarter.

And analysts say there are hints that a turnaround is brewing. Late last month, rival Juniper Networks (JNPR) reported financial results in line with expectations, and Juniper's CEO said the networking market is stabilizing.

"Cisco's a good bellwether for the economy because they are so dominant in their space, so it makes sense that they've followed the economic trends," said Ken Dulaney, Cisco analyst at Gartner.

Combating slumping demand: Cisco has faced slumping demand as businesses continue to trim IT spending. The company has opted to cut its prices in the past few quarters in an attempt to retain customers. Analysts say the method has worked, but it has still cut into Cisco's bottom line.

"Cisco is a company that sells you a lot of value for their cost, because it offers businesses one-stop shopping," said Dulaney. "Now that companies are trimming down, Cisco is getting attacked by low-cost providers. That will definitely hurt its profitability."

In an attempt to shore up demand, Cisco continues to innovate, especially in areas that smaller competitors could have difficulty matching. For instance, the company this year has been touting its new telepresence tools, which allow people to meet virtually using seamless high-definition video. The company said its telepresence profit more than doubled from a year ago.

"The company wants to raise people's demand level for bandwidth," Dulaney said. "If that flattens, competitors can take its business away. That's why Cisco is so hot for video."

But Dulaney said the company is also facing pressures from competitors like Microsoft (MSFT, Fortune 500) and Hewlett-Packard (HPQ, Fortune 500) as they also start making inroads into similar high-profit areas. Cisco is by far the biggest name in networking, and so far it has faced relatively little competition from businesses of that size.