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THE DAY AHEAD: Optimistic Cisco sees broadband bonanza

While Wall Street wonders what broadband technology --DSL or cable -- defines the broadband world, it might be easier to just invest in Cisco Systems Inc. (Nasdaq: CSCO). The company ditched its typical "healthy paranoia" and gave a relatively bullish outlook.

Cisco reported another stellar quarter beating third quarter estimates by a penny and topping revenue projections with sales of $3.15 billion. Just to make sure the market had nothing to gripe about, Cisco announced a 2-for-1 stock split, its eighth split in nine years.



Cisco: Can it keep growing?



On a conference call with analysts, Cisco officials had a smug answer when asked how they saw the broadband market shaping up given AT&T Corp.'s (NYSE: T) acquisition of MediaOne (NYSE: UMG) and the advance of digital subscriber line service.

"We think they are on equal footing, it's a jump ball between DSL and cable," said John Chambers, CEO of Cisco. "We don't think one architecture has an advantage over the other."

Put simply, Cisco doesn't care which technology wins. Cisco will benefit no matter what broadband technology wins because its networking gear will be used to build the next generation networks.

Cisco said it sees broadband sales -- equipment for DSL and cable deployments combined -- growing to a $500 million run rate by the fourth quarter with the market growing 100 percent a year. Cisco is working on voice-over-cable trials, which will "open up a whole new ball game."

AT&T can bet on cable and AOL can bet on DSL and satellite. Either way, Cisco will cash in because the existing networks aren't up to snuff.

That broadband tidbit was just a snippet on what was an upbeat earnings report and conference call. Basically, there's not a lot to worry about with Cisco even though the company fell short of addressing analysts' product concerns.

CEO John Chambers said he would address product issues from the 1996 Stratacom acquisition on the next conference call in August. The company is behind in its asynchronous transfer mode (ATM) offering. The bears will fret about Cisco falling behind in products and technology, but one fund manager noted it doesn't really matter. Like IBM, Cisco will do well with its mediocre products and around-the-clock service.

"We've known for awhile that Cisco products were mediocre, but they work and that's all purchasers care about," said Bill Schaff, fund manager for the Information Technology 100 Fund. "Cisco won't be cutting edge, but no one will get fired for buying Cisco."

Here are some other Cisco projections to ponder.

  • No worries about Y2K: Chambers said Year 2000 problems will be challenging, but "not as challenging as we thought one or two quarters ago." The Cisco chief said corporate customers are more optimistic about Y2K and have most of the problems solved.

    Most information technology departments are now making sure suppliers and customers have their Y2K act together, said Chambers. "We don't plan any major changes in strategy for Y2K concerns," he said.

  • Lots of worries on accounting: In previous conference calls, Chambers spent time talking about regulation from the Federal government. This time, however, Chambers took aim at the Federal Accounting Standards Board, the non-profit group that sets the accounting rules for U.S. companies.

    FASB has been moving to eliminate pooling-of-interest accounting, which is the life-blood of acquisition-happy tech companies such as Cisco. Pick a merger -- AOL-Netscape, Yahoo-Geocities/Broadcast.com -- and you'll find pooling-of-interests was a key driver for the deals. Pooling allows companies to combine results like they've been together the whole time without any hit to future earnings.

    FASB is pushing for purchase accounting, which will force companies to carry the costs of the merger well into the future at the expense of earnings. "The FASB regulation of pooling is a challenge to the new economy. You can't apply old-world accounting to the new world," said Chambers. "It is not a time to threaten the ecosystem."

    Chambers is specifically worried about his ecosystem. Cisco acquired four companies this quarter.

    Facts and figures

    Cisco plans on hiring a many as 2,000 new employees in the fourth quarter and that doesn't include the 650 workers the company will pick up via acquisitions. Cisco continues to dominate the router market. Sales to telecommunications carriers topped $1 billion for the first time. Cisco's sales to telcos are soaring, but the company is hardly a gorilla compared to more established equipment vendors such as Lucent (NYSE: LU), which acquired Ascend, and Nortel Networks (NYSE: NT). Cisco has $8.5 billion in cash and is generating nearly $300 million in cash a month.