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February 09, 2011, 4:50 PM EST
By Joseph Galante
(Updates to add gross margin in second paragraph.)
Feb. 9 (Bloomberg) -- Cisco Systems Inc., the largest provider of networking equipment, posted a gross margin that missed analysts’ estimates as the company spent more to develop products and competitors undercut them on prices.
Gross margin, or the percentage of profit left after subtracting production costs, in the period ended Jan. 29 fell to 62.4 percent, the company said today. That missed the 63.3 percent average of projections compiled by Bloomberg.
Research and development costs climbed 19 percent in the quarter, while sales and marketing expenses rose 15 percent. That outpaced a 6 percent sales increase. The company may be cutting its prices and extending better terms to its customers, giving them longer to pay, said Mark Sue, an analyst at RBC Capital Markets.
“The product gross margins declined quite meaningfully,” said New York-based Sue. “We know demand is improving but will Cisco capitalize on that, and will it have to resort to price cuts to get its fair share?”
Cisco fell 5.8 percent to $20.75 in late trading after rising 5 cents to $22.04 at 4 p.m. New York time in Nasdaq Stock Market trading.
Investors look to Cisco as a bellwether for the technology industry because it dominates the market for routers and switches, products that direct the flow of Internet traffic. Companies buy its switches for corporate networks, while phone and Web-service providers typically buy Cisco’s more-expensive routers.
Second-Quarter Profit
Earnings excluding some costs were 37 cents a share in the period ended Jan. 29, San Jose, California-based Cisco said today in a statement. That compared with 35 cents, the average of projections compiled by Bloomberg. Sales rose to $10.4 billion, also topping the average $10.2 billion estimate.
The company’s move into more than 30 new businesses has given rivals an opening to grab market share on its old turf, said Joanna Makris, an analyst at Mizuho Securities USA Inc.
“They’ve become the Procter & Gamble of networking,” Makris said, referring to the world’s largest consumer-products company, which has more than 70 brands. “The stocks that have outperformed them have been the more focused, nimble companies.” Makris has a “neutral” rating on the stock and doesn’t own it.
Cisco’s expansion into businesses such as servers, consumer video and smart-grid utilities is aimed at helping the company reach a long-term goal of 12 percent to 17 percent revenue growth. Its broadened ambitions have left cracks, with Juniper Networks Inc., Hewlett-Packard Co. and Brocade Communications Systems Inc. making inroads in the switch market, according to Mark McKechnie, an analyst at Gleacher & Co. in San Francisco.
Price Rivalry
Dell Inc. and Huawei Technologies Co. have also been able to undercut Cisco on prices for certain switches and routers, said Nikos Theodosopoulos, an analyst at UBS Securities LLC in New York.
“Cisco is accustomed to an environment where they’ve been able to command a premium price because they’re Cisco,” Makris said. “That doesn’t work in this market anymore.”
Net income fell to $1.52 billion, or 27 cents a share, from $1.85 billion, or 32 cents, a year earlier, the company said.
Cisco’s expansion into new businesses is aimed at helping the company reach a long-term goal of 12 percent to 17 percent revenue growth. Its broadened ambitions have left cracks, with Juniper Networks Inc., Hewlett-Packard Co. and Brocade Communications Systems Inc. making inroads in the switch market, according to Mark McKechnie, an analyst at Gleacher & Co.
Dell Inc. and Huawei Technologies Co. have also been able to undercut Cisco on prices for certain switches and routers, said Nikos Theodosopoulos, an analyst at UBS Securities LLC.
“Cisco is accustomed to an environment where they’ve been able to command a premium price because they’re Cisco,” Makris said. “That doesn’t work in this market anymore.”
Cash Strategy
The company, which has about $40 billion in cash, plans to issue its first dividend in the first half of the year. This week, it agreed to buy Inlet Technologies for $95 million in cash, and said last month it would purchase networking company Pari Networks for an undisclosed price.
Cisco is benefitting as U.S. service providers upgrade their networks to support surging use of mobile phones and video. Internet traffic over mobile devices will grow 26-fold by 2015, Cisco said.
Juniper, the second-largest U.S. maker of networking gear, said last month that profitability will improve this year as customer demand boosts sales growth at a faster rate than research and development costs. Its shares have climbed more than 60 percent in the past year.
(Cisco began a conference call at 4:30 p.m. New York time to discuss the results. To listen, go to {LIVE }.)
--With assistance from Ian King in San Francisco. Editors: Lisa Wolfson, Tom Giles
To contact the reporter on this story: Joseph Galante in San Francisco at jgalante3@bloomberg.net
To contact the editor responsible for this story: Tom Giles at tgiles5@bloomberg.net
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(Updates to add gross margin in second paragraph.)
Feb. 9 (Bloomberg) -- Cisco Systems Inc., the largest provider of networking equipment, posted a gross margin that missed analysts’ estimates as the company spent more to develop products and competitors undercut them on prices.
Gross margin, or the percentage of profit left after subtracting production costs, in the period ended Jan. 29 fell to 62.4 percent, the company said today. That missed the 63.3 percent average of projections compiled by Bloomberg.
Research and development costs climbed 19 percent in the quarter, while sales and marketing expenses rose 15 percent. That outpaced a 6 percent sales increase. The company may be cutting its prices and extending better terms to its customers, giving them longer to pay, said Mark Sue, an analyst at RBC Capital Markets.
“The product gross margins declined quite meaningfully,” said New York-based Sue. “We know demand is improving but will Cisco capitalize on that, and will it have to resort to price cuts to get its fair share?”
Cisco fell 5.8 percent to $20.75 in late trading after rising 5 cents to $22.04 at 4 p.m. New York time in Nasdaq Stock Market trading.
Investors look to Cisco as a bellwether for the technology industry because it dominates the market for routers and switches, products that direct the flow of Internet traffic. Companies buy its switches for corporate networks, while phone and Web-service providers typically buy Cisco’s more-expensive routers.
Second-Quarter Profit
Earnings excluding some costs were 37 cents a share in the period ended Jan. 29, San Jose, California-based Cisco said today in a statement. That compared with 35 cents, the average of projections compiled by Bloomberg. Sales rose to $10.4 billion, also topping the average $10.2 billion estimate.
The company’s move into more than 30 new businesses has given rivals an opening to grab market share on its old turf, said Joanna Makris, an analyst at Mizuho Securities USA Inc.
“They’ve become the Procter & Gamble of networking,” Makris said, referring to the world’s largest consumer-products company, which has more than 70 brands. “The stocks that have outperformed them have been the more focused, nimble companies.” Makris has a “neutral” rating on the stock and doesn’t own it.
Cisco’s expansion into businesses such as servers, consumer video and smart-grid utilities is aimed at helping the company reach a long-term goal of 12 percent to 17 percent revenue growth. Its broadened ambitions have left cracks, with Juniper Networks Inc., Hewlett-Packard Co. and Brocade Communications Systems Inc. making inroads in the switch market, according to Mark McKechnie, an analyst at Gleacher & Co. in San Francisco.
Price Rivalry
Dell Inc. and Huawei Technologies Co. have also been able to undercut Cisco on prices for certain switches and routers, said Nikos Theodosopoulos, an analyst at UBS Securities LLC in New York.
“Cisco is accustomed to an environment where they’ve been able to command a premium price because they’re Cisco,” Makris said. “That doesn’t work in this market anymore.”
Net income fell to $1.52 billion, or 27 cents a share, from $1.85 billion, or 32 cents, a year earlier, the company said.
Cisco’s expansion into new businesses is aimed at helping the company reach a long-term goal of 12 percent to 17 percent revenue growth. Its broadened ambitions have left cracks, with Juniper Networks Inc., Hewlett-Packard Co. and Brocade Communications Systems Inc. making inroads in the switch market, according to Mark McKechnie, an analyst at Gleacher & Co.
Dell Inc. and Huawei Technologies Co. have also been able to undercut Cisco on prices for certain switches and routers, said Nikos Theodosopoulos, an analyst at UBS Securities LLC.
“Cisco is accustomed to an environment where they’ve been able to command a premium price because they’re Cisco,” Makris said. “That doesn’t work in this market anymore.”
Cash Strategy
The company, which has about $40 billion in cash, plans to issue its first dividend in the first half of the year. This week, it agreed to buy Inlet Technologies for $95 million in cash, and said last month it would purchase networking company Pari Networks for an undisclosed price.
Cisco is benefitting as U.S. service providers upgrade their networks to support surging use of mobile phones and video. Internet traffic over mobile devices will grow 26-fold by 2015, Cisco said.
Juniper, the second-largest U.S. maker of networking gear, said last month that profitability will improve this year as customer demand boosts sales growth at a faster rate than research and development costs. Its shares have climbed more than 60 percent in the past year.
(Cisco began a conference call at 4:30 p.m. New York time to discuss the results. To listen, go to {LIVE }.)
--With assistance from Ian King in San Francisco. Editors: Lisa Wolfson, Tom Giles
To contact the reporter on this story: Joseph Galante in San Francisco at jgalante3@bloomberg.net
To contact the editor responsible for this story: Tom Giles at tgiles5@bloomberg.net
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