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Cisco earnings fall, but meet expectations

The network equipment maker's earnings fall but are enough to beat Wall Street expectations. Analysts' assessments are mixed amid a wider downturn in the communications industry.

Cisco Systems reported first-quarter earnings Monday that fell from those of a year ago, but excluding charges the results were enough to beat Wall Street expectations.

Including charges related to acquisitions, Cisco reported a net loss of $268 million, or a loss of 4 cents per share. Excluding charges, the network-equipment maker reported a profit of $332 million, or 4 cents per share, on revenue of $4.4 billion. Cisco's one-time acquisition charge totaled $37 million, or 1 cent per share on an after-tax basis.

In the same quarter a year ago, the company reported earnings of $1.4 billion, or 18 cents per share, on sales of $6.5 billion.

Wall Street analysts polled by First Call expected Cisco to earn 2 cents per share, with a range of 1 cent to 3 cents. Revenue for the quarter ending Oct. 31 was expected to finish at $4.1 billion, with estimates ranging from $4 billion to $4.3 billion.

Cisco's stock jumped in after-hours trading, climbing to $18.70 on the Instinet electronic brokerage system after rising 3.7 percent during the day to end at $17.90.

Just last month, CEO John Chambers said he was "very comfortable" with Wall Street's expectations.

"Given the very challenging economic and capital spending environment, we were pleased to deliver a solid quarter with good order linearity, sequential revenue growth and profitable market share gains," Chambers said in a statement.

Chambers said on a conference call with analysts that he was "cautiously optimistic" about Cisco's quarter, offering sales growth guidance of "flat to low sequential digits." But he cautioned analysts that, given the state of the world following the September terrorist attacks, "none of us really knows what is going to evolve over the next nine to 12 months."

Chambers did note that he saw no need for additional layoffs at the company, which recently laid off about 8,000 employees.

Dennis Powell, vice president and corporate controller, said Cisco's cost-cutting measures have resulted in a potential savings of $2 billion over the course of the next year--double the company's expectations. Included in the cost reductions are the company's layoffs, new cost controls, technology-focused reorganization and internal use of new software.

Cisco also made progress in the quarter in ridding itself of $2.2 billion in excess technology-component inventory it had previously written off, according to CFO Larry Carter. During the quarter, the company scrapped $450 million in components, sold another $32 million for proceeds of $4 million, and used $234 million to make products sold to customers or used internally. It also settled $118 million in prior commitments.

Mixed bag
Analysts' views on the outlook for Cisco remain decidedly mixed amid a wider downturn in the communications industry.

Though many analysts agree that Cisco's base of corporate customers will serve the company well amid further erosion among telecommunications companies, few believe it can return to its fast-growing days of the 1990s, when it boasted sales gains of 30 percent to 50 percent--and even greater at the height of the technology boom--every quarter.

Paul Johnson, an equities analyst with Robertson Stephens, said he "cannot justify the premium that the market is currently placing on (Cisco's) valuation."

Cisco's stock is up 60 percent from a three-year low since late September, but remains far off its 52-week high of $57.62. Johnson has a 52-week target price on the stock of $7.50.

Others also view Cisco's historical growth rate as an unreasonable expectation in the current climate but are more positive concerning the company's stock. Paul Sagawa, an analyst with Sanford C. Bernstein, sets "fair value" for Cisco shares at $14.

Also Monday, the company promoted Senior Vice President of Corporate Affairs Daniel Scheinman to the position of senior vice president of corporate development. In addition to his current responsibilities, Scheinman will be responsible for Cisco's acquisition strategy, partnerships and Internet-based projects. Scheinman joined Cisco in 1992.