Cisco Earnings Rise, Stock Drops

Cisco Umi

Six months ago Cisco Systems reported "probably the strongest quarter" in its history, as the company basked in its emergence from the worldwide economic decline. But in its first-quarter financial report, announced Wednesday, the firm appeared to be running off the rails.

Although quarterly earnings rose, the company's gloomy prediction for next-quarter sales rattled investors, plunging the stock down 17% Thursday and dragging down tech stocks and the broader market. Even Cisco seems to be searching for the reasons for the reversal.

Some of the problems were obvious -- state government business dropped 48% from the previous quarter as state governments struggled with their own financial shortfalls; cable operators, under increased pressure from declines in subscriber numbers, cut Cisco's orders by 35%. And, as the networking pacesetter, Cisco has a target on its back as its smaller competitors become more aggressive.

John Chambers, Cisco's chairman and CEO, said he was surprised by the "air pockets" the company encountered, but he expressed confidence that the company's product innovation and market share momentum would carry it through the difficult times.

"Our execution in the areas we can control and influence speak to the success and relevance of the company's strategy," said Chambers in a statement.

Cisco, which has long dominated the routers and switches market, has been branching out in recent years into video, data centers, servers, and virtualization. Following Cisco's release of its fiscal first-quarter results Wednesday, analysts seemed divided on whether they signaled an across-the-board drop in orders for technology products, or whether the results were Cisco-specific. Many agreed with Chambers' description that the company had hit some "air pockets" and would quickly recover.

Analysts had been predicting 13% growth in Cisco's 2011 fiscal year, but the company reduced that to between 9 and 12% and investors punished the company's stock for the lowered estimate. First-quarter earnings were $1.9 billion -- up 8% from $1.8 billion year-over-year. Revenue rose 19% to $10.75 billion

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