Commentary: Can things get even better for Cisco?

Cisco Systems (Nasdaq: CSCO) gave Wall Street everything it wanted and then some. Executives even shed a little bit of their "healthy paranoia" to hint that things could get better.

The networking equipment giant topped estimates by a penny with fiscal fourth quarter net income of $1.2 billion, or 16 cents per share, excluding special charges. Sales of $5.72 billion blew away projections and jumped 61 percent year-over-year and 16 percent sequentially.

Cisco's quarter was a blowout even by its own standards. And now for the big question -- What's next? When Cisco is priced to perfection, what's next is always a lingering question.

CEO John Chambers rattled off strong sales growth in all geographies and markets and noted that the company "executed even beyond our own stretched goals." The growth is extraordinary considering that Cisco is such a large company.

The biggest takeaway from that conference call was that Chambers referred to calendar 2000 as the year of architectural decisions for big businesses, which are phasing out voice networks (Lucent) for data networks (Cisco and Nortel). Once these companies decide on what gear they want, a two- to five-year investment cycle will begin, starting in 2001.

Chambers reckons that corporations will nearly double spending on information technology in some cases.

Chambers didn't say it directly, but it's fairly obvious that Cisco plans to rake in sales as that investment cycle begins. Given Cisco's historical execution and the recent woes of the competition (3Com and Lucent), the company should win a big chunk of the spending.

Cisco's goal is to grow faster than the networking market, which is expected to grow at about a 30 percent to 50 percent clip. Chambers, who acknowledged that he is more bullish than usual about the next year, said Cisco was sending "a more bullish message than we've historically sent for the next 12 months."

Listwin departs

If it weren't for such a big quarter, Cisco's news that its No. 2 executive is leaving would be a big negative.

Don Listwin, Cisco's No. 2 executive, will be the new CEO of the newly merged Phone.com (Nasdaq: PHCM) and Software.com (Nasdaq: SWCM). Chambers made the announcement on the company's earnings conference call, and it was a classy goodbye.

Will Listwin's departure affect shares? Probably not. There's a big difference between the departure of Amazon.com's Joe Galli to VerticalNet and Listwin's exit. Listwin is already leaving a well-run company that has a deep management team. Amazon is trying to win back investor confidence.

Acquisition binge

Cisco's strategy is to VC its way to the top. Chambers sees startups as Cisco's primary competition. These startups have great technology and engineers and could give Cisco fits -- if the networking giant didn't buy most of them.

During the fourth quarter, Cisco completed the acquisitions of Atlantech Technologies Ltd., JetCell Inc., PentaCom Ltd., Qeyton Systems, and Seagull Semiconductor Ltd. Cisco has acquired so many companies, Chambers is having trouble keeping them straight.

Chambers, who slipped and referred to his executive team as the acquisition team on the Cisco call, also called Pirelli, a recent optical networking acquisition, Philips.

Pesky optical questions ...

And speaking of acquisitions, Cisco said its optical business is at a revenue run rate well above $1 billion. Nortel claims top spot in the market, but Cisco said it will have new products "one after another" from its Monterey, Cerent and Pirelli units.

Cisco danced around topics such as optical market share and other specifics. The company said it will strive to meet "insatiable demand" for optical gear.

Cisco reiterated that startups are the biggest threat to its optical plans. Among traditional firms, Nortel is the toughest foe, executives said.

... Not to mention margin questions

CFO Larry Carter said gross margins fell from 64.3 percent in the third quarter to 64 percent in the fourth quarter. Carter also noted that gross margins will be coming down 50 to 100 basis points a quarter. Carter cited product mix as the key factor. As the company enters new markets, margins take a hit.

Margins fell 30 basis points from the third quarter to the fourth quarter.

Management seemed to have a reassuring answer about margins, but if you want to nit-pick, margins are a good target.

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