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Cisco profit beats Street, shares rise on outlook

A sign marking a Cisco office is pictured in San Diego, California November 12, 2012. REUTERS/Mike Blake
A sign marking a Cisco office is pictured in San Diego, California November 12, 2012. REUTERS/Mike Blake

By Sinead Carew and Nicola Leske

NEW YORK (Reuters) - Network equipment maker Cisco Systems Inc posted a higher than expected quarterly profit and said current-quarter revenue could increase, giving some relief to investors who had worried it was being hurt by weak technology spending.

Cisco shares rose about 8 percent after Chief Executive John Chambers said the company was seeing some good signs in the United States and that other parts of the world are "encouraging."

"We are managing the business to account for a continued slow steady recovery on a global basis," Chambers said.

Chambers' commentary is closely watched by investors as Cisco is seen as a strong indicator for the general health of the technology industry because of its broad customer base.

Cisco forecast current-quarter earnings per share of 50 to 52 cents, excluding unusual items, in line with Wall Street expectations. It said revenue would grow in a range of 4 to 7 percent from the year-ago quarter.

This implies revenue of about $12.16 billion to $12.5 billion, compared with analysts' expectations for $12.47 billion according to Thomson Reuters I/B/E/S.

RBC Capital analyst Mark Sue said the outlook was much better than expected since several Cisco rivals had much lower forecasts for the current quarter.

"All things considered the guidance was actually decent. The commentary was encouraging considering the mixed environment we're in," Sue said.

Recent signs of weakness from companies including Juniper Networks and International Business Machines Corp made investors worry that Cisco would follow suit, due to sluggish spending by customers such as the U.S. government.

"They seem to be bucking the trend and that's encouraging, said Sue.

While Chambers said revenue from the U.S. federal government was down 3 percent in the quarter due to spending cutbacks, this was offset by increased state and local government spending which boosted overall U.S. public sector revenue by 5 percent.

About 20 percent of Cisco's revenue comes from public sector clients around the world, Chief Financial Officer Frank Calderoni said in an interview.

Calderoni said Cisco is seeing "a slow and steady recovery" in its global business with signs of economic strength in places such as the United States and weakness in areas including Southern Europe and some Asian countries.

"We had a stronger performance in two areas: the Americas, with primary good performance in the United States, and the emerging countries around the world," he said.

Profit for the fiscal third quarter ended on April 27 grew to $2.5 billion, or 46 cents per share, from $2.17 billion, or 40 cents per share, in the year-ago quarter.

Excluding unusual items, earnings per share came in at 51 cents compared with Wall Street expectations for 49 cents according to Thomson Reuters I/B/E/S.

Revenue rose more than 5 percent to $12.2 billion from $11.6 billion and compared with Wall Street expectations for $12.18 billion according to Thomson Reuters I/B/E/S.

Mark McKechnie, an analyst at Evercore was impressed with Cisco's gross margin of 63 percent, above the company's target of 61 to 62 percent.

"It will be interesting to see if they can raise the guidance on margins, McKechnie said.

Cisco forecast fourth-quarter gross margins of 61 to 62 percent, matching the prior quarter's estimate.

Cisco shares rose to $23 in extended trading after closing at $21.21 on Nasdaq.

(Reporting by Sinead Carew and Nicola Leske; Editing by Richard Chang)

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