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It's official: Cisco beats estimates

After some numbers are released prematurely, the company announces earnings that are down sharply from a year ago but better than what the Street was expecting.

The worst-kept secret on Wall Street was made official Wednesday: Gains in market share helped networking giant Cisco Systems post second-quarter earnings that surpassed Wall Street expectations.

The company posted pro forma earnings of $664 million, or 9 cents per share, on revenue of $4.8 billion for its fiscal 2002 second quarter. The numbers compared with earnings of $1.3 billion, or 18 cents per share, for the same period a year ago. The drop-off was tied to a fierce contraction in potential telecommunicationscustomers, among other factors.

Including one-time charges related to acquisition costs, Cisco posted net income of $660 million, or 9 cents per share. The charges, however, were completely offset by a $195 million gain from the use of previously written-off inventory.

Cisco was expected to earn 5 cents per share on revenue of $4.55 billion before charges, according to consensus estimates from First Call.

A Cisco employee inadvertently prereleased some financial numbers regarding the company's quarter earlier Wednesday in an internal e-mail, prompting a short-lived rally on Wall Street once the company disclosed the flub.

But the upside surprise did not stop investors from punishing Cisco in after-hours trading, with shares down as much as 8 percent at one point. The negative reaction may be due to Cisco's guidance of "flat" to "low single digit" growth for its third quarter and this comment from Chief Executive John Chambers on the company's financial analyst conference call after the release of earnings: "Visibility is still very limited."

Chambers also noted that the company's third quarter is traditionally its most "seasonally challenging."

Before the precipitous decline in the fortunes of the networking industry, Cisco was in the habit of beating analyst expectations by a penny.

With reduced expectations for sales in the telecommunications industry, investors are looking to Cisco for signs that a so-called bottom in the market has been reached. Chambers has been cautious in his outlook concerning future growth, but has hinted in recent months that there are signs that sales are improving.

The company reported an 8 percent quarter-over-quarter increase in sales, following a 3 percent increase from the fiscal 2001 fourth quarter to the 2002 first quarter.

Chambers said the quarter showed that the company's strategy amid a downturn in the fortunes of the networking industry is working.

"This was a very solid quarter," Chambers said in a statement. "I was especially pleased with our profitable market share gains and strong operational performance in a very challenging market, as well as our continued improvement to an already strong balance sheet."

Analysts expected a slight upside surprise from the company and think Cisco is well-positioned, compared with competitors, amid a challenging environment for equipment makers. Its reliance on corporations for sales has helped it weather a significant storm among telecommunications companies. Numerous start-ups and established players have run into money troubles, resulting in reduced spending on new equipment.

"In the uncertain telecom investment environment, we think Cisco's strong position in the enterprise segment should provide protection from the cuts in service provider" spending, Salomon Smith Barney equities analyst Alex Henderson said in a report.

Cisco has regained some market share from smaller company Juniper Networks in the high-end routing arena, but it continues to fight an incursion in another market--called the network "edge"--from the likes of privately held Unisphere Networks, Riverstone Networks and Juniper.

Cisco ended the quarter with $21 billion in cash and investments, with $1.3 billion of that sum invested in public equities, according to Cisco Chief Financial Officer Larry Carter.

Cisco's number of employees decreased by 760, bringing its total work force to 36,786 employees. "In general, we are not replacing attrition," Carter said.

Cisco executives said they have spent $600 million since September of last year to repurchase shares in the company at an average price of $15.15.