Tech Industry

Cisco growth offset by charges

Wall Street doesn't like it when companies miss the mark. Even after chalking up another quarter of growth, Cisco Systems' stock slips over three percent.

Wall Street doesn't like it when companies miss the mark, even if it is directly related to expansion. During trading this morning, Cisco Systems' (CSCO) stock slipped over three percent to trade as low as 64-5/8, down from yesterday's close of 67-1/8.

Cisco chalked up another quarter of growth yesterday, but acquisition charges erased the prospects of beating analyst expectations.

Cisco reported a net income of $338.5 million, or 49 cents per share, compared with $209.7 million, or 31 cents per share, for the second quarter ending January 25.

"We are pleased to report the eleventh consecutive quarter of double-digit revenue growth for Cisco," said John Chambers, president and CEO of Cisco, in a statement.

Although Cisco saw its sales and net income surge, the quarter's acquisition dragged it below analyst expectations.

In November, Cisco completed its purchase of NETSYS Technologies, a provider of network problem-solving, design, planning, and management services, in exchange for common stock worth approximately $79 million; it took a one-time charge of $43.2 million.

The company also sold a portion of a minority stock investment which resulted in a gain of $47.3 million, or 4 cents a share, to net income for the quarter.

Prior to these charges and gains, the company would have posted a net income of $351.9 million, or 51 cents per share, beating analysts' estimates of 50 cents a share, according to First Call.

Cisco saw less growth than it had hoped in Japan, Germany, France, and Italy, due to circumstances specific to those countries, said Van Kasper & Co analyst Paul Saunders. "France has a cultural aversion to networking, and they are just less prone to adopt networking technology. But, these aren't major problems, just areas of concern."

The company said it has gained progress in its three key markets--enterprise, service provider, and small and medium-sized business--by providing end-to-end network systems through internal product developments, strategic alliances, minority investments and acquisitions.

"During the past several quarters, we have seen leading enterprise customers move to reduce network complexity by aligning with Cisco as their strategic vendor for network systems. This trend is now beginning to emerge in the service provider area with a number of customers choosing Cisco for their end-to-end network system requirements," said Chambers.

Cisco may have 80 percent of the IP-switching market, but it doesn't monopolize all aspects of the industry.

"Despite [Cisco] being dominant in so many areas, there is plenty of competition. In some areas Ascend has about a year lead," said Saunders.

Ascend's MAX TNT, which provides a multi-protocol WAN access switch that lets network service providers and businesses build high-density networks, is one product that has taken hold of some of Cisco's market.

3Com is another competitor that Cisco needs to look out for, he added.

During the quarter, Cisco and Hewlett-Packard announced a worldwide business alliance in which the companies will offer integrated end-to-end network-computing solutions with a one-stop approach to service and support for customers.

In addition, Cisco made minority investments in Interlink and OpenConnect.

Cisco also expanded its NetBeyond family, which delivers local area network hubs and switches for Internet access, with the Cisco 770 series of access products that address the needs of small-office and home-office (SOHO) users.

In the wake of the recently announced alliance of 3Com, IBM, and Cascade Communications to consolidate the budding IP switching market, Cisco faces no immediate threat.

"That whole issue is very future-oriented, and Cisco has announced their own version called tag switching," said Saunders.

In the meantime, Saunders anticipates 54 cents a share for this quarter and a fiscal-year total of $2.11 per share. Cisco's fiscal year ends in July.