Internet Phone Demand Helps Lift Cisco Profit

Strong demand for Internet phones helped drive up fiscal first-quarter profit at Cisco Systems Inc., but some of the company’s largest units did worse than expected.

The top maker of gear for directing Internet traffic said Tuesday that net income rose 29% to $1.4 billion, or 21 cents a share, from $1.1 billion, or 15 cents, a year earlier. Sales rose 17% to $6 billion.

The earnings matched Wall Street’s consensus estimates, but sales fell about $50 million short and profitability slipped from the previous quarter. San Jose-based Cisco said it expected second-quarter sales to increase 1% to 3% from the quarter just ended, coming after a sequential increase of less than 1%.

“You’re looking at a couple quarters here of pretty minimal growth,” said analyst Erik Suppiger of Pacific Growth Equities. “The year-over-year growth rates are not very compelling.”

Cisco shares fell 22 cents to $19.75 in regular Nasdaq trading, then dropped 51 cents further to $19.24 in extended trading after the earnings report.

Cisco’s gross profit margin decreased in the three months ended Oct. 30, falling to 67.2% of revenue from 68.4% in the prior quarter.

Chief Executive John Chambers blamed competitive pressure on prices from Chinese companies, among other factors. But he agreed with analysts who said a bigger problem was the shift by customers from Cisco’s routers, the most sophisticated computers it makes.

Router sales declined from the fourth quarter and accounted for 21% of Cisco’s first-quarter sales. In all of the previous fiscal year, routers made up more than 24% of revenue, said analyst Susan Kalla of Friedman Billings Ramsey.

Suppiger said he believed that Cisco had been losing router market share to Juniper Networks Inc.

Cisco executives cited their efforts to revamp the products, explaining that they often charge too little for gear just after it has been improved.

Cisco fared better in sales of its Internet phones for sending voice calls over the Net. Chambers said the company sold more than 500,000 units in the quarter, bringing in 2% more revenue than in the fourth quarter even though the average price fell.

The biggest orders came from Bank of America Corp., which is installing 180,000 of the gadgets, and Ford Motor Co., which plans to use 50,000.

Cisco Chief Technology Officer Charles Giancarlo said his company had become one of the four largest U.S. suppliers of private branch exchanges, which route calls inside companies.

“We could be No. 1 within the next two years on a worldwide basis,” Giancarlo said.

After the last quarter’s earnings call, on which Chambers reported seeing more caution from the CEOs of big customers, Cisco shares fell more than 10%.

This time, Chambers said he saw no clear shift in sentiment.

“It’s too early to say,” he said. “I would characterize this quarter as just down the middle.”