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Cisco earnings top 30 percent

The networking bellwether caps a strong year with fourth-quarter growth of over 30 percent.

    Cisco Systems (CSCO) capped a strong year with fourth-quarter growth of over 30 percent.

    At the close of the market, the networking juggernaut announced sales of more than $1.7 billion and earnings of $383.2 million, or 55 cents per share, for the just-completed fiscal fourth quarter. Those figures exclude one-time charges related to the close of three acquisitions and the sale of an investment.

    The company also announced 57 percent growth over its previous fiscal year, thanks to more than $6.4 billion in revenue--$2.05 a share. The numbers came in exactly according to a consensus estimate compiled by First Call.

    While some smaller networking companies have faltered this quarter, the big guns--such as 3Com and Bay Networks--have provided solid numbers to the watchful analysts on Wall Street. That led to similar expectations for Cisco, which is often thought to be the bellwether for the networking industry. The renewed growth follows a lull in the networking sector during the first part of the year.

    In expectation of positive numbers from Cisco, the company's stock was in serious play throughout the day, with more than 9 million shares trading hands. By the sound of the bell, the offering was up 5/16 to 81-5/8, a long way from May, when the stock hovered in the 50s.

    "I obviously feel better about the market than I did at the end of the second quarter and the end of the third quarter," noted Cisco CEO John Chambers. "I actually feel better about the market by a fair ways than I did six months ago."

    The fourth quarter was a busy one for Cisco, which continues to augment its portfolio of technology via acquisition. The networking powerhouse shelled out over $400 million in stock and cash to add four companies: hardware makers Skystone Systems, Ardent Communications, and Dagaz Technologies, as well as firewall software developer Global Internet Software Group, a subsidiary of Global Internet.Com.

    Three of these purchases were finalized in the quarter, adding a one-time charge of $290.6 million, or 35 cents per share, to the quarterly equation. The company also sold a minority stock investment, resulting in an additional 2 cents per share in earnings.

    Taking the charges into account, the company realized income of $151 million for the quarter, or 22 cents per share. For the year, as a result of other acquisitions, actual income was more than $1 billion, or $1.52 per share.

    Most analysts remain bullish on Cisco's future, pointing to the company's strength in most key markets in the networking sector.

    "It's easy to feel good about Cisco. They're absolutely dominant in most of the areas they compete," said Noel Lindsay, an analyst with Deutsche Morgan Grenfell (DMG).

    Lindsay said going forward the challenge facing the networking kingpin is the shift within networks from a reliance on routers--long Cisco's bread-and-butter technology--to broader implementations of switching hardware, a cheaper alternative.

    "At this point, it appears they are in pretty good shape to continue their past success," he said. DMG's earnings-per-share estimate turned out to be in line with the consensus expectation of 55 cents per share.

    There are concerns among some industry observers going forward for the company as the previously mentioned transition to switch-based networks occurs. Market researcher Dataquest recently penned a critical analysis of Cisco as a company in transition, likely to feel the heat from competitors due to its roots in routers rather than in switching hardware.

    But others feel that the multibillion-dollar Cisco machine will be able to adapt to any new wrinkles in the networking industry, given the breadth of its product line, its weight in the industry, and its huge installed base.

    Cisco officials noted that for the first time, revenue from hardware products in the LAN (local area switching) switching area surpassed revenue from the company's high-end line of routers, though router sales were the highest they have ever been. Sales from LAN switching increased more than 100 percent year over year.

    Chambers said he felt comfortable with estimates of 30 to 50 percent annual growth in the networking sector over the next several years. "We believe there is a great deal of opportunity long term in this industry," he said.

    Other tidbits from the earnings announcement include:

  • Recognition on the part of Cisco management of "sporadic" spending in the service provider market segment.

  • Announcement that the company's next-generation 12000 router, previously known as the Big Fast Router and Gigabit Switch Router, will begin limited shipment in the first quarter of fiscal 1998, with an official unveiling of the much-reported product coming next month.

  • A warning from Chambers that the next period, the first quarter of fiscal 1998, could be "more tricky than normal" due to shorter product lead cycles.