updated 2/8/2005 5:45:56 PM ET 2005-02-08T22:45:56

Cisco Systems Inc.’s profits rose in the fiscal second quarter, though sales missed expectations, as the company continued to see strength both in its traditional router and switching businesses and advanced technologies such as Internet phones.

The San Jose-based network equipment maker also said Tuesday that it expects the upward trend to continue in the third quarter with year-over-year revenue growth as high as 10 percent, even though the period is historically one of the weakest.

“We were very pleased about the quarter. Advanced technologies were the top highlight, and our cash engine is cranking pretty good,” said John Chambers, Cisco’s chief executive. “Our architectural strategy appears to be playing both here and around the world.”

For the three months ended Jan. 29, Cisco earned $1.4 billion, or 21 cents per share. That compares with $724 million, or 10 cents per share, in the same period of fiscal 2004, which was hit by a $567 million noncash charge resulting from an accounting change.

Excluding special items, Cisco earned $1.48 billion, or 22 cents per share, compared with a profit of $1.32 billion, or 18 cents per share, in the same period in fiscal 2004. Sales jumped 12 percent to $6.06 billion, from $5.4 billion last year.

The earnings met Wall Street expectations, while revenue missed. Analysts were expecting Cisco to earn 22 cents on sales of $6.13 billion, according to a survey by Thomson First Call.

In November, the company said it expected year-over-year sales to increase as much as 14 percent over the current quarter. On Tuesday, Chambers said he was “comfortable” with the revenue growth.

“Revenue came in a little light, but ... things are still somewhat challenging right now,” said Chris Sessing, an analyst at Crowell, Weedon & Co. “It was nice to hear that order growth exceeded revenue, so it sounds like the pipeline is pretty strong.”

Strategy pays off
Since the high-tech bubble burst four years ago, Cisco has been branching out into areas beyond its core router and switching business. The strategy is paying off, Chambers said.

“This quarter’s solid results, highlighted by record net income and continued order growth across our routing, switching and advanced technologies, indicate continued product leadership and solid market momentum,” he said.

He credited Cisco’s success with a decision to develop advanced technologies, make them work together and integrate them into its core routers and switches, which act as traffic cops for data over much of the Internet and other networks.

Chambers said that Cisco’s “advanced technologies continued to lead the way in Q2” with both revenues and orders growing in the 40 percent range, Chambers said of the technologies — home networking, Internet telephony, optical networking, security, storage and wireless.

In the phone market, Cisco shipped 570,000 handsets in the second quarter. Its home networking division, Linksys, shipped 470,000 Internet voice adapters, which allow people to make phone calls using broadband connections, in the first quarter they were available.

By comparison, Linksys shipped just 30,000 home routers when those products were first available in 2000.

Chambers also said year-over-year growth rates among U.S. businesses was strong in the second quarter — a sign that capital spending is on the increase.

“While it’s too early to call this a sustainable movement, we are obviously cautiously optimistic to see this occurring in Q2, which in recent years hasn’t been that strong a quarter for the enterprise and commercial markets in the U.S.,” he said.

Cisco continues to grow, with the company adding roughly 1,000 engineering and sales jobs.

For the first six months of fiscal 2005, Cisco earned $2.8 billion, or 42 cents per share, on sales of $12.03 billion. That compares with profits of $1.8 billion, or 25 cents per share, on sales of $10.5 billion in the same period of fiscal 2004.

The results were announced after financial markets closed. Earlier, Cisco shares closed at $18.24, up 8 cents, on the Nasdaq Stock Market. They lost 20 cents in after-hours trading.

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