Cisco falls a penny short of views, remains "confident"

The networking giant reports second-quarter earnings of 18 cents per share, missing Wall Street expectations by a penny.

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Analyst: Has Cisco hit a financial wall?
Don Luskin, CEO, MetaMarkets.com
Networking giant Cisco Systems released a double dose of bad news Tuesday, missing second-quarter earnings expectations by a penny and warning that sequential revenue growth for the next two quarters will be flat.

Shares fell in after-hours trading, down $2.35 to $33.40, or 7 percent, according to the Island ECN Web site.

Cisco's pro forma second-quarter profit was $1.33 billion, or 18 cents per share, compared with compared with $897 million, or 12 cents per share, for the same period in 2000. Second-quarter revenue increased 55 percent, rising to $6.75 billion from $4.36 billion in 2000.

Wall Street analysts expected Cisco to earn 19 cents per share on revenue of $7.22 billion, according to a survey of analysts by First Call.

In a conference call with analysts Tuesday afternoon, Cisco executives said the company's third-quarter sales will remain flat or fall 5 percent when compared with the company's second-quarter results. Fourth-quarter revenue is also expected to stay flat sequentially, Cisco executives said.

Wall Street analysts had previously predicted sequential third-quarter sales growth of between 6 percent and 7 percent.

Cisco Chief Executive John Chambers said the main culprits of slower growth are the struggling U.S. economy and sluggish sales of networking equipment to telecommunications service providers. The company is also seeing slack sales to businesses, particularly in manufacturing, he said.

"The U.S. economy is slowing down faster than anyone expected," Chambers said on the conference call. "I believe there will be a two-calendar-quarter slowdown. I am optimistic for the second half of the year."

Chambers said he expects Cisco's revenue for the 2001 fiscal year to grow 40 percent over last year. He also predicts the company will see 30 percent to 50 percent yearly revenue growth in the 2002 fiscal year. Chamber's predictions are based on an assumption that the U.S. economy will recover in the second half of the calendar year and that the economic slowdown doesn't spread to international countries.

"We remain confident about the market opportunity ahead of us over the next three to five years," Chambers said in a statement. "This confidence is based on the continued impact of the Internet on productivity and just how much work needs to be done before every company is an e-company and a majority of the world's countries are e-countries."

Tuesday's results show that Cisco hasn't been immune to the slowdown in network equipment sales that forced rivals 3Com, Lucent Technologies and Foundry Networks to announce earnings warnings in December. Like other networking companies, Cisco executives said the company was hit hard by sluggish sales to emerging service providers, such as Covad Communications and PSINet, who have struggled financially.

The networking leader historically has been on a roll, beating Wall Street analysts' expectations 14 quarters in a row before Tuesday's results, analysts said.

SG Cowen Securities analyst Michael Jung said he was not surprised Cisco missed estimates. Chambers in January warned that the second quarter was more challenging than the company expected. Subsequently, the company instituted a partial hiring freeze to help control costs.

"It was expected. It's not surprising they came in shy considering the comments that Chambers made," he said.

But Jung said Cisco's forecasts for the forthcoming two quarters were more conservative than he expected.

"What Cisco said (Tuesday) reconfirmed what other companies have already said," Jung said. "Even though Cisco is in a leading position in market share for its family of products, it's in the same boat when it comes to economic issues."

Cisco executives and analysts maintain that Cisco missed estimates because of the slowing economy and not because of competition. Analysts have said Cisco is better positioned to weather a downturn than most companies because of its product breadth and strong international sales.

Unlike some of Cisco's rivals, analysts said the company is equally strong in sales of equipment to service providers and to corporations, better protecting it from potential cutbacks in spending by service providers.

During the conference call, Cisco executives said the company had strong sales throughout Asia and Europe. Executives also highlighted robust sales of Internet telephony equipment to businesses and high-speed networking equipment sales to service providers.

Even though the company is trying to control costs, Cisco Chief Strategy Officer Mike Volpi said he doesn't expect the company to back off its plans to acquire companies. Cisco has a long-running strategy of buying companies to stay competitive with its younger, smaller rivals, such as Redback Networks and Sycamore Networks.

Volpi said in an interview that the company is in a better position to buy competitors because start-ups are cheaper now.

"We don't see a dramatic change in acquisitions, except perhaps for a slight slowing down," he added.