Business spending on technology goods and services is returning as the economy mends, pumping new life into suppliers such as Cisco Systems Inc., though it has been slower to reach other sectors.
The big maker of networking gear on Wednesday posted a 23% jump in quarterly profit and 8% gain in revenue, its first such increases in a year.
The economy has entered a new “phase of the recovery,” said John Chambers, Cisco’s chief executive, in a call with analysts, adding that he planned to hire up to 3,000 workers in coming quarters. “This is one of the most robust positive turnarounds I’ve seen in my career,” he added.
Road to recovery: Chambers says Cisco’s growth was too uniform across products, geographies for it not to signal a greater shift in the economy. Chris Ratcliffe / Bloomberg
Cisco’s results add to a growing body of evidence that companies are starting to open their wallets after the recession. The commerce department last week said business spending on equipment and software rose at a 13.3% annual rate in the fourth quarter, adjusting for inflation. That was the fastest growth since early 2006.
Still, spending was 18.5% below the level it reached in late 2007. Just to keep pace with depreciation, economists reckon companies will need to continue raising capital-spending levels in the quarters to come.
That might happen, especially with improved corporate profits helping to fuel optimism. Through Tuesday night, with 255 companies in the Standard and Poor’s (S&P) 500 having reported, earnings were 47% higher than a year ago, excluding financial services companies whose troubles last year would skew the figures. Sales growth was 3.8% so far, excluding financial services companies, noted S&P.
Chambers said that Cisco’s return to growth was partly a result of a rising tide. Cisco’s growth “was too uniform” across product lines and geographies for it not to signal a greater shift in the economy, he said in an interview.
Companies appear particularly eager to spend on technology, which forms the backbone of many corporate infrastructures and can boost productivity. As a result, Cisco and its peers, which fell into a severe slump starting in the fourth quarter of 2008, have rebounded sooner than companies in other sectors, such as industrial equipment.
While most of the tech sector’s initial gains came from selling products such as laptop computers and smart phones to consumers, recent results point to improvement in sales to business.
Intel Corp. last month said revenue for the division that sells chips for corporate server systems rose 42%. Sybase Corp., known for database software that is popular among financial services companies, last week reported a 34% jump in profit for the period ended in December—which it characterized as the best quarter in its history.
Signs of capital spending outside the tech sector have been gloomier. Though many companies are predicting a rebound, the evidence of a turnaround has been scant so far. General Electric Co.’s revenue fell 10% in the fourth quarter, on declining orders for industrial equipment and the shrinkage of GE Capital, for example, while hydraulic parts maker Parker Hannifin Corp. said revenue declined 12%.
Telecommunications provider Verizon Communications Inc., for one, said sales to businesses fell in the fourth quarter and added it wasn’t seeing any significant pick-up yet in capital or technology spending by its largest customers. “The signs of recovery are slow,” John Killian, Verizon’s chief financial officer, said last week.
Cisco is one of the first tech companies to report earnings that include January. The company is widely seen as a barometer for the tech industry because its customers span a variety of industries and sizes.
It’s clear the economy “is getting better”, said Nikos Theodosopoulos, an analyst at UBS Securities, adding, “Now the story is the slope” and how Cisco differentiates its recovery from the rest of the industry. Cisco’s revenue increase was significant, he said, and likely helped by customers looking to spend the remainder of their tech budgets at the end of December.
For its fiscal second quarter ended 23 January, Cisco’s profit was $1.85 billion (around Rs8,530 crore), up from $1.5 billion a year ago. Revenue rose to $9.8 billion from $9.1 billion a year earlier. Before these results, Cisco had experienced four straight quarters of declining sales and profits, including a 13% revenue drop in the October quarter. For the current quarter, Cisco forecast revenue would rise 23-26% from a year ago.
The results sent shares of the company up 3.6% to $23.90 in after-hours trading, after closing at $23.07 in 4p.m trading on the Nasdaq on Wednesday.
Cisco’s bullish outlook holds particular weight as it was among the first companies to say the downturn, once limited to the financial sector, was affecting the rest of the economy.
Also, Cisco has a track record of emerging from recessions and continuing to grow. A high-flier during the dot-com era, Cisco suffered a revenue decline when that bubble burst and took several years to fully recover.
But Cisco nearly doubled its revenue between 2004 and the start of the current recession, as businesses invested in their infrastructure as the Internet took on an increasingly important role in day-to-day business.
Chambers said Cisco would “continue to be very aggressive” and didn’t plan to stop expanding. He added that Cisco, which trimmed its workforce last year, expects to hire between 2,000 and 3,000 new workers during the next several quarters. The company currently has just over 65,000 employees.
Justin Lahart and John Shipman contributed to this story.