Cisco Posts 49% Jump in Profit
Cisco Systems said Tuesday that its fiscal second-quarter profit jumped a greater-than-expected 49%, showing again how the company has parlayed its dominance in providing the backbone of Internet and telecommunications networks into astonishing profit and revenue growth.
The news pushed Cisco shares to an all-time high in after-hours trading. If the gains hold today, the 10-year-old maker of equipment for routing Internet traffic may topple General Electric Co. as the second-largest U.S. company in market value--even though GE is 10 times Cisco’s size in terms of sales.
Only Microsoft Corp. is worth more, at $567 billion.
“This is the Information Age,” said Goldman, Sachs & Co. analyst Ajay Diwan. “Companies that provide communication technology or computing technology should exceed the market cap of a company that dominated the Industrial Age.”
Indeed, in GE’s recently announced drive to push more of its business to the Web, the company will likely rely heavily on routers, switches and other computer networking equipment from San Jose-based Cisco.
Microsoft passed GE in market value--stock price times the number of shares outstanding--in September 1998. The software giant lost the top spot about a year later after it was ruled a monopoly in federal court, and then regained it.
Cisco on Tuesday said profit before costs related to acquisitions and gains from the sale of investments rose to $906 million, or 25 cents a share in the latest quarter, from $609 million, or 17 cents a year earlier. The Wall Street consensus estimate had been 24 cents.
Net income after one-time gains and losses totaled $825 million, or 23 cents a share, up from $282 million, or 8 cents a share a year earlier. Revenue jumped 52%, to $4.35 billion, from $2.85 billion.
Cisco shares closed at $125.81, up 63 cents, in Nasdaq trading. After hours, they climbed to as much as $131, an all-time high.
With its earnings announcement Cisco also announced a 2-for-1 stock split, its ninth since going public in February 1990.
“Their underlying business is a lot stronger than people expected,” Diwan said.
In part because of a rapid string of acquisitions, Cisco is pulling away from such networking rivals as 3Com Corp. and Lucent Technologies.
In a conference call with analysts, Cisco said it has made 20 acquisitions in the past 12 months and expects to make another 20 to 25 in next 12 months.
Executives said that they expected sales to keep growing by as much as 30% to 50% in countries where the economy is strong, and that they were most concerned about Japan.
Despite Cisco’s own spectacular stock performance, Chief Executive John Chambers said the biggest threat to the company is that its employees are being lured away with “out of this world” stock option packages from start-up companies.
But Chambers said that voluntary attrition is less than 5% annually and that he isn’t overly concerned that the figure will escalate dramatically.
He also said it was a “tremendous honor” to be considered in the same class as GE, “which is the best-run company in the world,” Chambers said. “It is exciting. It also shows you there’s no substitute for being in the right industry at the right time.”
Cisco shares, which haven’t been cheap by conventional measures for a long time, have followed its earnings upward. The company’s stock has nearly tripled in the past year, and the ratio of its price to its previous 12 months’ earnings has more than doubled, to about 141. The Dow Jones average, by comparison, has a price-earnings ratio of 25.
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Riding the Networking Boom
Shares of Cisco Systems have skyrocketed in recent years as the company has emerged as the leader in key areas of the computer networking business. At its current price, Cisco is priced at 126 times the $1 a share Wall Street expects it to earn in the fiscal year that will end July 31. But the company’s earnings also are expected to grow about 30% a year, on average, over the next five years. Monthly closes and latest for the stock, on Nasdaq:
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* as of close of regular trading on Tuesday
Source: Bloomberg News
