Cisco Hits Forecasts but Still Struggling
Network equipment giant Cisco Systems Inc. matched Wall Street’s modest expectations Tuesday even though its quarterly profit tumbled 86%, and the company warned that sales could shrink by an additional 5% in the current quarter.
“No one really knows when the economic and capital spending will bottom out and go up,” said John Chambers, Cisco’s chief executive, in a conference call with investment analysts. He added that slack demand in Europe and Asia could drag down U.S. sales even if a domestic recovery begins this year.
Chambers called 1999 and 2000 “a unique time of rapid spending,” and seemed to edge back from his long-held projection that Cisco can grow 30% to 50% annually in a strong economy. He called that growth rate “a stretch, but [an] achievable goal for Cisco.”
Many analysts view his growth target as farfetched.
“The problem isn’t Cisco’s products. The problem isn’t Cisco’s reputation. The problem isn’t competition,” said Fred Hickey, editor of High-Tech Strategist, a newsletter in Nashua, N.H. “Not one telecom vendor has announced that they are increasing spending in the next year.”
On a pro forma basis, Cisco earned $163 million, or 12 cents per share, in its fiscal fourth quarter that ended July 28, excluding one-time gains and charges. In the quarter a year earlier, Cisco earned a pro forma $1.2 billion, or 16 cents per share.
For the fourth quarter, Cisco’s net profit was $7 million, or less than 1 cent per share--a 99% drop from profit of $796 million, or 11 cents per share, a year earlier.
“[Cisco’s] profit is all interest income. There’s zero operating income there,” said analyst Ariane Mahler, with Dresdner Kleinwort Wasserstein. Mahler noted how Cisco had to rely on its store of cash to generate profit instead of relying on sales of its network gear. On Tuesday Cisco said it has $18.5 billion in investments and cash on hand.
Cisco’s sales in the latest quarter fell 25% to $4.3 billion, from $5.7 billion a year ago.
Like many communications equipment and technology firms, Cisco has grappled with the sputtering global economy and a slump in spending on telecommunications gear. Cisco is the dominant supplier of switches and routers that steer data on the Internet.
The disappointing results followed a dismal third fiscal quarter, in which Cisco posted a net loss of $2.7 billion--its first loss as a public company--and announced that it would shed 8,500 jobs.
For the full fiscal year Cisco announced a net loss of $1 billion, or 14 cents per share, on sales of $22.3 billion. In the prior year, Cisco posted net income of $2.7 billion, or 39 cents per share, on sales of $18.9 billion.
Analysts said that the company’s ongoing malaise reinforces the idea that prospects for tech companies will not improve markedly until well into next year.
But Cisco enjoys more favorable longer-term prospects than most of its large competitors. And Cisco’s sales mix is weighted toward large enterprises, which seem to be emerging from the economic slowdown more rapidly than telecom service providers.
Cisco competitors Nortel Networks and Lucent Technologies, which are much more focused on the telecom industry, saw their revenues radically contract in the last year.
“Two-thirds of [Cisco’s] sales is at least stable, if not sequentially slightly improving,” said Sam Wilson, an analyst with Merrill Lynch. Many technology buyers at big companies froze spending in the first quarter, but are now opening their checkbooks to pay for top priorities, he said.
San Jose-based Cisco’s stock dropped 28 cents in regular Nasdaq trading to close at $19.26, then fell to $18.80 in after-hours trading following the earnings announcement.
Cisco shares have lost 76% of their value since hitting a record high of $79.38 in March 2000.
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Times wire services were used in compiling this story.
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Cisco Skid
Cisco Systems said sales in its
fourth fiscal quarter ended July 28 dived 25% from a year earlier, as many companies have stopped ordering new tech equipment.
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Sales each fiscal quarter, in billions
4th quarter: $4.3 billion
Source: Company reports
