Cisco Misses Profit Forecasts

Internet equipment powerhouse Cisco Systems Inc. missed Wall Street’s earnings projections for the first time in 11 years as a public company and warned that the sputtering U.S. economy would slow the company’s double-digit growth.

“I believe we are in at least a two-calendar-quarter slowdown,” Cisco Chief Executive John Chambers told analysts Tuesday.

The company’s quarterly results were still strong compared with the previous year, with sales and pro forma net income up about 50%.

However, the consensus among analysts surveyed by First Call/Thomson Financial was that Cisco’s sales would be $7.2 billion and pro forma earnings would be 19 cents per share for its second quarter, ended Jan. 27. Instead, Cisco reported sales of $6.75 billion and earnings of $1.33 billion, or 18 cents per share, before one-time items.

A sharp cut in capital spending by U.S. companies--starting in mid-December--is the reason Cisco failed to meet analysts’ expectations, Chambers said. In addition to cutbacks by Internet service providers, he pointed to reduced spending by manufacturing companies that use Cisco equipment for corporate computer networks and e-commerce services.

Mike Volpe, Cisco’s chief strategy officer, said the economic slowdown had widespread implications, but it was hard to say what the implication might be for other tech companies’ shares. “The market has done a lot of correcting to date to our stock and other companies’ stocks,” he said.

Cisco’s chief financial officer, Larry Carter, told financial analysts to expect revenue growth in the current quarter to be “flat to down 5%” from its second quarter, and its fourth quarter to be flat compared with the third.

Chambers predicted “the next several quarters will be challenging.”

San Jose-based Cisco is viewed as a bellwether for “new economy” companies because it is a leading supplier of data communications equipment, ranging from data routers to network switches, that help make the Internet work for corporations as well as ISPs.

The earnings announcement caused Cisco’s stock price to drop 6% to $33.56 in after-hours trading Tuesday. Cisco’s stock had climbed 3% to $35.75 in regular trading on Nasdaq.

“Cisco missed both on revenue and earnings [projections],” said Chuck Hill, research director at First Call/Thomson Financial.

In a bid to slash costs and meet profit targets, Cisco said it will hire 1,500 to 2,000 workers in the current quarter, about half the number hired in previous quarters.

Other technology stocks fell after Cisco’s earnings were released. Cisco’s rival Juniper Networks, which closed at $102.19 in regular Nasdaq trading, fell as low as $99.13 in after-hours trading. Chip maker PMC-Sierra Inc., which closed at $66.56, fell to $64.63 in after-hours trading.

Companies typically pay a price on Wall Street for missing the targets set by analysts, who base their projections on information provided by the companies each quarter. Cisco’s executives had done a phenomenal job over the years in managing Wall Street’s expectations, and had reported earnings exactly 1 cent per share above consensus estimates for 3 1/2 years.

Last month Chambers tried to nudge down expectations, saying in speeches that the slowing economy was causing a more challenging quarter than Cisco had anticipated. Analysts responded by reducing their projections, but mainly for the next three quarters, not the one that just ended.

Volpe said Cisco’s earnings per share were within the range of estimates made by analysts. “We focus on hitting the range,” he said.

“We have shown that we’re not immune to the economic cycle and trends in the capital markets,” Volpe said. “The economy is slowing at a faster pace than anybody expected.”

U.S. customers account for about half of Cisco’s business. Chambers said overseas markets remain strong, with abundant potential for growth as the Internet expands and more businesses embrace e-commerce.

The U.S. slowdown led Cisco to accumulate larger inventories, which drove down its profit margins. Carter said it would take two to three quarters to bring inventories back to more acceptable levels.

The firm expects to close its fiscal year in July with sales growth “in the 40% range” from the previous fiscal year, Chambers said. The following year, that increase should be “in the 30% to 50% range,” he said, which continues to be Cisco’s projection for the next three to five years.

Executives said the slowdown has rocked everyone in the communications industry, not just Cisco. Said Volpe, “We’re gaining market share in most of the sectors that we participate in.”

*

Times wire services were used in compiling this report.