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Cisco earnings on track

The networking bellwether reports that revenues and earnings growth are on track, though its stock drops in aftermarket trading.

Networking industry bellwether Cisco Systems (CSCO) reported that its third-quarter revenue and earnings growth stayed on track today, despite skepticism among investors.

Cisco reported net income of $378.3 million, or 55 cents a share, for the third quarter ending April 26, compared with net profits of $245.6 million or 37 cents a share a year ago. The company released its earnings report after the market's close.

Excluding a $32.3 million pretax gain from selling a portion of a stock investment, Cisco posted profits of $358 million, or 52 cents a share. That figure was in line with analysts' estimates, according to First Call.

The relatively positive report failed to sway investors, at least immediately. Cisco's stock was down in after-market trading, and at least one analyst said he would not be surprised if the networking giant's share price is weak tomorrow as well.

Cisco closed today at 57-3/4, down 1-1/8 from yesterday. The stock in recent weeks has been trading in the mid-50s, thanks to a slight recovery sparked by news of new products. (See related story)

Cisco reported its smallest quarter-to-quarter growth rate in a while, a 3.5 percent increase. But the market had already expected a lower growth rate and had built that into expectations, according to Amar Senan, an analyst with Volpe, Welty.

"This was the bottom range of [expectations]." he said.

Despite the slower growth, Senan said that "many people are relieved because they thought [Cisco] would miss the numbers." He remains cautious about the company's fourth quarter outlook, but his 1998 forecast remains positive.

The giant networking firm's financial performance has been known to sway the technology-heavy Nasdaq Composite Index. Cisco has been one of many networking firms to capitalize on the need to expand the plumbing for the Internet and the trend of installing enormous single networks for corporations.

Cisco generated revenues of $1.65 billion in the quarter, up from $1 billion a year ago. The company posted revenues of $1.6 billion in the previous quarter.

The industry has been beset by wide fear of diminishing returns, even for normally skyrocketing stocks like Cascade Communications (CSCC) and 3Com (COMS).

The highest fliers have been hit the hardest because analysts no longer believe that these companies can maintain their growth rates.

Some analysts say that their colleagues are being shortsighted in their skepticism. "People are really focused on the numbers this quarter, and frankly, they should be looking at the overall outlook," said Paul Weinstein, a managing director for PaineWebber.

Financial analysts say Cisco, like many networking firms, faces multiple challenges in a fast-changing competitive landscape.

Cisco's stock has been in a tailspin since mid-January, tumbling from a high of 75. Much of the downturn followed comments from CEO John Chambers in February that indicated the company's international sales have been slower than expected. As a result, a few financial houses downgraded the company's stock.

The company also announced a reorganization two weeks ago, targeting three newly focused groups at service providers, enterprise networks, and small and medium-sized businesses.

Still, investors are concerned about increased competition for the networking monolith. New technology called IP switching is being billed as an effective replacement for routers, Cisco's bread-and-butter product line. Strong merger plays by 3Com and U.S. Robotics and Cascade and Ascend Communications will make these companies compete more with Cisco.

Cisco has been responding to the challenges with a string of products, including additions to its line of switches for enterprise networks and departmental workgroups. The switches combine support for most local network topologies with ATM (asynchronous transfer mode) connections. The company is rumored to have a next-generation router up its sleeve as well.

The need for networking equipment is obviously still growing, but investors may still take a couple of quarters to adjust to the end of the heady days of triple-digit, year-over-year growth.