Cisco Systems Inc. ( CSCO ) delivered a sign of improving tech-sector demand as the company’s newer software and services businesses more than offset weaker revenue from its traditional networking products.
The San Jose, Calif., company’s fiscal third-quarter profit grew 14%, topping Wall Street’s expectations after a slew of negative results from peers in the information-technology industry.
“Enterprise growth is on a very good trend,” Chairman and Chief Executive John Chambers said during a call with analysts. “It’s nothing to write home about, but it’s very solid economic growth”
Cisco said it expects its core profit to reach between 50 cents and 52 cents a share this quarter, bracketing analysts’ average target of 51 cents, according to a poll by Thomson Reuters. Its revenue target left more room for surprises, calling for 4% to 7% growth. That implies some $12.7 billion to $13.07 billion of revenue; analysts were expecting $12.47 billion.
Shares jumped 8.5% to $23.01 as improving product orders added to optimism around the company’s results. As of Wednesday’s close, the stock was up 7.9% so far this year.
Cisco, the world’s largest supplier of Internet routers and switches, often warned of sales headwinds last year as corporate and government customers tightened spending, adding pressure on the company to diversify its revenue base with more profitable software and services.
The company continued shuffling its product portfolio this year by integrating new acquisitions of mobile-phone technology and Wi-Fi software. It also sold its consumer-focused Linksys home-router business to Belkin International Inc.
Mr. Chambers said the company’s evolution to an IT services provider from a communications equipment maker helped to drive its results in the latest quarter. The benefits came as other network-focused rivals struggled, he said.
“The communications companies have had a pretty tough run this fiscal year,” Mr. Chambers said.
Cisco’s product orders, which flatlined during the previous quarter, grew 4% in the most recent period. Orders by television and telecom service providers picked up 8%, while public-sector customers grew a slower 1%.
For the quarter ended April 27, Cisco posted a profit of $2.48 billion, or 46 cents a share, up from $2.17 billion, or 40 cents a share, a year earlier. Excluding stock-based compensation expenses and other exceptional costs, per-share earnings rose to 51 cents from 48 cents.
Revenue was up 5.4% at $12.22 billion.
In February, Cisco predicted adjusted earnings of 48 cents to 50 cents a share and revenue growth between 4% and 6%.
Revenue from video service providers jumped 30%, while sales of network switching gear, the category in which Cisco made its name, slipped about 2%. Sales of next-generating routing products were flat.
Overall product sales grew 5%, while revenue from its services segment increased 7.1%, boosting the company’s overall profitability. Gross margins ticked down to 63% from 63.1% a year earlier.
That moderate decline showed Cisco is having success keeping its profitability roughly in tact despite fierce competition from other network gear makers, according to ISI Group analyst Brian Marshall.
“If they can really maintain this low 60s level for the next couple of years … that could be a material move higher,” he said.