(By Mani) Cisco Systems Inc. (NASDAQ:CSCO) reported a better than expected October quarter displaying strong execution in a tough macro as profits rose 18 percent. While EMEA and government remain areas of concern, Asia Pacific, excluding China, performed well and the U.S. was better than expected.
The October quarter marks Cisco's fourth consecutive quarter of higher profits following four quarters of year-over-year profit declines.
Meanwhile, unified computing system (UCS), service provider video (SPV) and wireless added incremental revenue and gross margin expandion due to favorable product mix and tight cost controls pushing operating margins up 180 basis points (bps) year-over-year.
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Shares of the company have gapped open sharply higher Wednesday morning and broke out to a 3-week high. It rose as much as 8 percent to $18.25.
San Jose, California-based Cisco Systems is the largest vendor of data networking equipment and the leading global supplier of Internet networking solutions.
For the first quarter, the company reported net income of $2.1 billion, or 39 cents a share, compared with $1.8 billion, or 33 cents a share, for the year-ago quarter. Excluding items, it earned.48 cents a share, topping the Street view of 46 cents a share. Quarterly net sales for the first quarter rose 5.5 percent to $11.88 billion, which came in above analysts' consensus estimate of $11.77 billion.
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"We're still concerned with U.S. federal spending ahead of the fiscal cliff and believe U.S. enterprises are becoming more cautious given political uncertainty. That said, Cisco's breadth of products and strong execution should allow it to gain share of overall IT budgets," Oppenheimer analyst Ittai Kidron said in a client note.
Cisco saw traction at SPV, which registered 30 percent growth in revenues, while wireless revenue advanced 38 percent, and UCS gained share against an overall decline in the server market. Gross margin widened 130bps on higher product mix, and along with tight opex control, operating margin moved up 180 bps to 27.9 percent.
However, book-to-bill was below 1.0 and product orders have decelerated for five straight quarters. EMEA remains challenged while the collaboration vertical has yet to turn around.
Nevertheless, the company's plan to leverage its scale and bolster R&D (SDN, etc.) is beginning to drive positive results, and cost efficiencies in sales and marketing also beginning to unfold while higher service attach rates and improving mix stand to benefit margins.
"We believe Cisco is still transforming with more revenue and cost initiatives ahead," Kidron said.
Summing up, Cisco delivered a strong quarterly results in the face of a challenging macro economic conditions, and while spending patterns are challenging, Cisco is demonstrating strong execution and the benefits of its architecture approach.
"Given the uncertainty, we think stock provides a safe haven," Kidron added.