Global reach helps Cisco post strong Q2 earnings

Cisco Systems posted solid financial results for its most recent quarter on Wednesday, but the networking giant lowered its financial forecast for the months ahead, citing a slowdown in U.S. and European markets.

The company’s earnings were in line with financial expectations. Excluding charges, earnings were US$2.4 billion, or US$0.38 per share, on US$9.8 billion in revenue. Financial analysts had been expecting earnings of US$0.38 per share on US$9.78 billion in revenue, according to a survey by Thomson Financial.

Sales were up 16.5 per cent year over year for Cisco’s second fiscal quarter of 2008, which ended Jan. 26.

Cisco, the world’s largest router manufacturer, has benefited from the growth of Internet traffic over the past decade, and — more recently — from the flurry of investments in Web 2.0 technologies. But there have been signs recently that growth may be slowing in this area. Just last week, Google alarmed Wall Street by falling just short of expectations, and worries of a U.S. recession may have caused jitters in U.S. stock markets recently.

The next few quarters will be “extremely challenging,” Cisco chairman and CEO John Chambers said in a conference call with analysts, adding that his recent participation in the World Economic Forum in Davos, Switzerland, only reinforced this perception. “We are seeing our U.S. and European customers becoming increasingly cautious. This was my key take-away from the World Economic Forum two weeks ago.”

The company saw sales growth drop off during January, and it is sharply lowering its financial guidance for the quarter.

Cisco expects revenue to grow “approximately 10 per cent” year over year during the third quarter, Chambers said. Analysts had been expecting revenue growth in the 15 per cent range, according to Thomson Financial.

Cisco’s stock took a drubbing in after-hours trading after the results were released. It was trading at US$21.34 late Wednesday afternoon, down more than 7.5 per cent from the day’s close, according to Yahoo Finance.

Still, Chambers sounded some optimistic notes during the call. He said that he does not expect market conditions to deteriorate further, and added that lower valuations of technology companies could actually help Cisco, which made 11 acquisitions in 2007.

“It is our intent to expand our market share during this correction, as we have done in the past,” he said. “We think we can gain more market share during the challenging time.”

Growth in Web 2.0 applications will drive overall growth for the next five to seven years, he predicted. More than 60 per cent of the company’s business now occurs outside of the U.S., he added.

This was the last financial analyst call for outgoing CFO Dennis Powell, who plans to retire on Feb. 15. He will be succeeded by Cisco senior vice-president of finance, Frank Calderoni.

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