Cisco Systems: Does Higher Profit Prove Doldrums Over?

The results sent Cisco shares on a two-day tear, up nearly 10 percent, bolstering the Dow Jones Industrials, of which the company is a member.

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"We delivered a solid quarter," CEO John Chambers told investors. "In every major market transition, we have historically emerged even stronger, with more market share and even stronger market focus."

There are several key reasons why the Cisco profit report augurs well for it and the sector:

First is that Cisco still has to pay costs of a restructuring in the third quarter, when it fired 6,500 employees and closed a factory in Mexico with another 5,000 workers. Tthey will ease to only $100 million this quarter, far below the third quarter's $750 million. Cisco sold a factory in Mexico to Foxconn, the Taiwanese electronics contractor that is Apple's principal vendor.

To move more into the home and consumer electronics sector, Cisco acquired Scientific-Atlanta in 2006 for $6.9 billion. Now, it's been shutting factories where it made set-top boxes sold to carriers like Verizon Communications for its FiOS TV services.

Second, Cisco's revenue appears to have been relatively immune from what Chambers, 62, had warned would be a slowdown in orders from the "public sector," or government agencies. The fears appear to have been overblown. Indeed, Cisco scored several major sales to telephone carriers in Germany and said its public business actually rose about 10 percent.

IBM, for example, reported its third quarter public sector sales were solid and that European orders were strong, despite fears of getting hammered by the European financial crisis.

Third, as the No. 1 provider of switches and routers, ahead of smaller vendors like Juniper Networks and Huawei Technologies, Cisco has won major new orders from several top U.S. service providers.

These customers are giants like AT&T and Verizon Communications, which constantly upgrade networks to move more traffic. They account for about one third of Cisco's revenue.

Cisco may also have benefited from the management shakeup at rival HP, where CEO Leo Apotheker was ousted in favor of former eBay CEO Meg Whitman on Sept. 25. HP's sales staff may have been distracted during the quarter. And Chambers is well-regarded as a good manager, who promised to improve performance after a dismal third quarter.

"Cisco is starting to capture the benefit of its renewed engineering effoirts," Jefferies analyst George Notter told clients. He also termed the company's public-sector sales "surprisingly strong."

Cisco's lead independent director, Carol Bartz, 63, lost her job as CEO of Yahoo on Sept. 5. Among her fellow Cisco directors is Yahoo co-founder and former CEO Jerry Yang, 42.

Cisco's market capitalization is now $102.4 billion, a far cry from 2000, when it was around $579 billion.

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