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Cisco's Net Income Nearly Doubles

Networking company says businesses are starting to spend more on technology and reports strong gains in sales and profits for its fiscal second quarter.

Cisco Systems, the world's largest maker of networking equipment, on Tuesday reported strong gains in sales and profits for its fiscal second quarter ended Jan. 29. The company said net sales for the quarter were $6.1 billion, an increase of 12.3% from a year earlier. Cisco's net income nearly doubled to $1.4 billion, or 21 cents per share, compared with $724 million, or 10 cents per share, a year ago.

Businesses are starting to increase spending on technology, CEO John Chambers says. "We saw positive momentum among our enterprise customers," he said during a conference call with analysts. "This is the first second quarter we've seen in a number of years that had very solid year-over-year growth. We are cautiously optimistic."

The numbers fell slightly short of Wall Street expectations. Analysts expected Cisco to report net income of 22 cents per share, according to a poll by Thomson First Call.

Cisco expects growth to continue in the 10% to 15% range annually; Chambers said the company's growth is mainly influenced by global economic trends and national growth rates. Competition also has an effect, and Cisco faces a growing threat in Asia. Growth in that region is less than in the United States and Japan, and Cisco expects "a wave of low-cost competitors from China," Chambers said.

Cisco saw annual growth ranging from 30% to 70% in several areas that it has focused on in recent years. Growth in the company's core routing and switching products was in the 10% to 15% range, Chambers said, but was much higher in areas that Cisco calls "advanced technologies." Growth in storage was up more than 70%; IP telephony and home networking saw revenue grow more than 40%; and revenue in the optical and security markets grew by more than 30% compared with a year ago. "We appear to have gained market share in most categories," he said. "And our value proposition to customers continues to expand as these advanced technologies get integrated into the core network fabric."

Cisco's strategy of integrating a variety of related technologies into core products is starting to pay off, Chambers said. The company's Integrated Services Router, which was introduced in September, could hit annual sales of $1 billion. And 40% of the Integrated Services Routers are being shipped enabled for security and voice capabilities.

Business-technology managers are getting tired of managing everything themselves and are turning to Cisco for integrated systems that can do more together than they can as individual products, says Charles Giancarlo, Cisco's chief technology officer. A Cisco IP telephony voice system can easily be turned into a videoconferencing system with the addition of a $100 camera, he says. And if a main centralized IP telephone system fails, a Cisco branch router can take over and provide communications services to the branch office.

"Customers want a solution that is easy to use, transparent, and enables solutions that they couldn't do before," he says. "For example, now we can do mirroring and backup of storage across continents."

IP telephony is another strong growth area. The company shipped 570,000 IP telephones in the second quarter, and its Linksys home-networking unit shipped more than 470,000 IP phone adapters.

During the past quarter, Cisco completed the acquisitions of BCN Systems, Jahi Networks, NetSolve, and Perfigo. It also revealed plans to buy Protego Networks and Airespace.

Consolidation among telecom service providers was "healthy for the industry" and wouldn't hurt Cisco, Chambers said. He noted that both SBC Communications Inc., which has disclosed plans to buy AT&T for $16 billion, and AT&T were strong customers of Cisco's gear.

Net sales for the first six months of fiscal 2005 were $12.0 billion, compared with $10.5 billion for the same period in fiscal 2004, an increase of 14.6%. Cisco's earnings-per-share results were helped by the company's aggressive moves to buy back its stock. Cisco spent $2.7 billion to buy back 140 million shares in the second quarter of fiscal 2005.

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