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Cisco Surges on Forecast of First Sales Growth in Eight Quarters

Networking gear maker sees growing software contribution; traditional hardware sales fell again in fiscal first quarter

Ian King (Bloomberg) -- Cisco Systems Inc., whose hardware carries the majority of the world’s internet data traffic, saw its shares rise the most in more than a year and a half after it forecast the first revenue gain in eight quarters

The outlook provides an early sign of success for the company’s transition toward services and software, sending the stock up as much as 7.5 percent in New York Thursday, the biggest increase since February 2016.

Revenue in the current period will climb as much as 3 percent from a year earlier, the San Jose, California-based company said Wednesday in a statement. That indicates sales as high as $11.9 billion, compared with an average analyst estimate of $11.7 billion, according to data compiled by Bloomberg.

Chief Executive Officer Chuck Robbins has made a string of purchases to bolster Cisco’s ability to offer software and services that let corporations remotely manage and secure their networks, seeking to ease its dependence on the shrinking market for high-priced hardware. Switches and routers still provide the bulk of Cisco’s sales, and demand is receding as customers turn to cheaper equipment or scale back purchases to outsource their computing and networking needs.

“He’s making good strategic moves,” said David Heger, an analyst at Edward Jones & Co. ”It’s still challenging to make those growth pieces big enough.”

In October the company agreed to buy Broadsoft Inc. for about $1.9 billion, bringing in cloud-based communications products and services.

“We have been executing this strategy since Chuck took over,” Chief Financial Officer Kelly Kramer said in a telephone interview. “In the software and subscriptions transition, we’ve really made a lot of progress.”

Kramer said that Cisco, which is one of the richest companies in the technology industry with about $71.6 billion in cash, believes that the proposed tax changes in the U.S. would help the company.

If tax legislation passes, “we’ll be able to get much more aggressive on the share buyback” and the company would have more flexibility for spending on acquisitions, she said.

Profit excluding certain items in the first quarter, which ended Oct. 28, was 61 cents a share. Sales fell 2 percent to $12.1 billion. That marked the seventh consecutive year-over-year contraction in quarterly revenue. Analysts on average projected profit of 60 cents a share on revenue of $12.1 billion, according to data compiled by Bloomberg.

Earnings in the fiscal second quarter, which ends in January, will be 58 to 60 cents a share, the company said. Analysts projected 58 cents.

Robbins is working to restore the kind of growth that made Cisco one of the world’s largest companies. The networking-gear maker hasn’t reported an annual revenue gain of more than 10 percent since 2010. His effort to fire up sales is being held back by a shift to computing in the cloud -- in remote data centers that provide services over the internet. Owners of such facilities, like Amazon.com Inc.’s Amazon Web Services, are increasingly building their own hardware and replacing traditional suppliers of servers, storage and networking equipment.

By product, infrastructure platforms, which includes its main switch and router businesses, had sales of $6.97 billion, down 4 percent from a year earlier. Applications, its software and teleconferencing products unit, increased 6 percent to $1.2 billion. Security-related sales rose 8 percent to $585 million.

Deferred revenue in the form of recurring software and subscriptions was up 37 percent from a year earlier at $5.2 billion. Executives point to that as the key indicator of its future performance and progress toward becoming less reliant on hardware.

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