Cisco earnings sound drumroll for recovery

The networking giant's strong second-quarter earnings and positive comments from the company's CEO suggest that a tech turnaround may be under way.

Marguerite Reardon Former senior reporter
Marguerite Reardon started as a CNET News reporter in 2004, covering cellphone services, broadband, citywide Wi-Fi, the Net neutrality debate and the consolidation of the phone companies.
Marguerite Reardon
3 min read
Cisco Systems' second-quarter earnings inched past Wall Street targets on Tuesday, suggesting that a technology turnaround is under way, even though the company's chief executive officer said customers may still be cautious about spending.

The networking giant attributed its strong quarter largely to healthy sales in its business of supplying gear to data and voice service providers, and to momentum in new product areas such as storage, security and wireless.

For the fiscal second quarter, ended Jan. 24, Cisco posted a profit of $1.29 billion, or 18 cents a share, before an accounting charge--a penny ahead of Wall Street analyst estimates. That profit total compares with $991 million, or 14 cents a share, a year earlier. After the accounting charge, the last quarter earnings were $724 million, or 10 cents a share.

Revenue rose to $5.4 billion from $4.7 billion in the same period a year ago, again ahead of estimates.

"For the first time in a long time, I believe the external factors are more positive," Cisco CEO John Chambers said during a conference call. "In Q1 (the first quarter) it was a minority view. Now the majority of our customers are cautiously optimistic."

Chambers said the San Jose, Calif.-based company continued to see strength in its core switching and routing business. For the second quarter in a row, sales of its GSR 12000 router, a product used by service providers to shunt traffic across the Internet, were strong. The increase in sales in this category coincides with positive earnings from Juniper Networks, Cisco's main routing competitor, which also saw a rise in routing revenue.

Cisco also reported positive momentum in its advanced technology group, which grew to account for 15 percent of the company's overall revenue. Storage, which had been weak in the first quarter, took in $40 million in sales--a leap of 120 percent, compared with that period. Security bookings came in at about $250 million, making it the first product category in the advanced technology group that looks likely to achieve $1 billion in revenue for the year.

Consumer and wireless sales also grew, according to Cisco. Internet telephony sales declined during the quarter, but the company expects them to rebound in the third fiscal quarter.

Cisco's strength in the data and voice service provider market echoes what other companies have reported during the quarter. Juniper CEO Scott Kriens said at the time of the company's last earnings report that he expected the increased demand for Internet Protocol (IP) routing to also benefit Cisco. Lucent Technologies, Nortel Networks and other competitors also reported strong quarters.

Much of the service provider spending Cisco saw in the previous quarter came from international carriers, which are spending more of their budgets on IP products, according to Chambers. North American carriers are also spending on IP. Last week, Verizon Communications said it plans to spend a significant amount of its 2004 budget on IP and multiprotocol label switching (MPLS) gear as well as on voice over IP (VoIP) equipment.

While the data and voice service provider market, which makes up 25 percent of the company's total revenue, was strong, Chambers also said that spending from large corporations and small and medium-size businesses, which make up the other 75 percent of sales, is still not at the level he would like to see.

"Today's economy has gone from a 'Show me' economy to a 'How strong and how long will it last?' economy," Chambers said during the conference call. "CEOs are still more cautious than I would expect in this stage of the recovery in their spending and hiring."

For the third quarter of fiscal 2004, the company said it expects revenue to increase 1 percent to 3 percent sequentially.