THE DAY AHEAD: Cash cow Cisco passes Y2K test

Larry Dignan
3 min read

Networking gear maker Cisco Systems (Nasdaq: CSCO) jumped ahead of the bellwether brigade and should keep investors cheering until the end of the year. And the one thing that could trip Cisco -- a Y2K slowdown -- seems to be a non-issue.

Cisco, which is one of the Nasdaq big four with Intel Corp. (Nasdaq: INTC), Microsoft Corp. (Nasdaq: MSFT) and Dell Computer (Nasdaq: DELL), delivered stellar fiscal first quarter results after market close Tuesday as revenue came in at $3.88 billion with operating earnings of $837 million, or 24 cents a share. Both revenue and earnings topped expectations.

Cisco: Best Net-related stock around?

The results were staggering as sales jumped 49 percent from a year ago and earnings jumped by the same margin. Sequentially, Cisco's first quarter sales were up 9 percent. Analysts were expecting growth in the 7 percent range. Cisco is generating $400 million in cash a month.

But the real kicker was the outlook in regard to Year 2000 risks. Cisco CEO John Chambers, who normally has "healthy paranoia," said second quarter guidance was unchanged. "We have a little more visibility and I am slightly more optimistic," said Chambers.

The one wild card is Cisco's sales to corporations. Chambers sees growth in that market flat to down in the second quarter. Enterprise sales "will be difficult to forecast," said Chambers. Cisco officials said they haven't seen any freezes on spending, but government and financial service customers could slow spending.

The good news? Enterprise sales represent about 30 percent of Cisco's business and the outlook is far from being a doomsday forecast. Cisco's real cash cow -- sales to service providers and small- to medium-sized businesses -- won't see any slowdown related to Y2K. And any Y2K slowdown in the enterprise would be a short-term issue, said Chambers.

Orders in the enterprise and small- to mid-sized business segments were up 30 percent in the quarter and service provider orders were up more than 80 percent.

On the enterprise side of the business, Chambers said Cisco's alliance with IBM (NYSE: IBM) to deliver networking technologies and services to service providers would rev up sales, but it's too early to tell the impact.

Eyeing Nortel

How do you know Nortel (NYSE: NT) is gaining momentum? Cisco mentioned the company on a conference call.

Cisco officials made it clear that the networking market had three main players -- Cisco, Lucent Technologies (NYSE: LU) and Nortel.

"We're watching Nortel a little more than we were a quarter ago," said Chambers.

That's a good idea. Nortel said Tuesday it would cut router prices 50 percent compared to leading rivals such as Cisco (Nortel statement). The move came with a slew of other Nortel announcements and is designed to grab market share. Analysts contacted on Tuesday weren't worried about Nortel, but that could change.

Startups the biggest threat

Another item worth noting is Cisco's concerns about start-ups.

Chambers said capital is flowing into start-ups such as Sycamore Networks (Nasdaq: SCMR), Juniper Networks (Nasdaq: JNPR) and others that could be a threat to Cisco.

That's why the company made sure it gave analysts a update on its product development.

When a networking upstart is worth billions overnight via an IPO, it makes it tough for an established player to match spending in the lab. Don't cry for Cisco though. The company is probably more concerned about valuations because it's acquisition happy. Cisco has made 44 acquisitions including Tuesday's purchase of Aironet (Nasdaq: AIRO) for $799 million.

However, it is hard to ignore that startups are getting expensive.

That's why Cisco forked over $7 billion in August for Cerent, a networking startup without a dime of revenue. Speaking of Cerent, Cisco said the integration of the company was "off to a good start."

The Cerent deal closed at the beginning of the month and Chambers said the company was off to a $300 million revenue run rate. That's just a projection, but Cisco said it should be able to deliver.

Cisco said Cerent products are about to make it into some big deals, possibly with Baby Bells.