Cisco Beats Forecasts With Surge in Profit

Computer networking giant Cisco Systems Inc. beat Wall Street expectations Tuesday with strong quarterly profit, but the results don’t necessarily mean the beleaguered tech sector has finally glimpsed the light at the end of the tunnel.

San Jose-based Cisco said net income for its fiscal fourth quarter ballooned to $772 million, or 10 cents a share, up dramatically from $7 million, or less than a penny a share, in the same period last year. Net sales for the three months ended July 27 reached $4.8 billion, a 12% increase over sales of $4.3 billion a year earlier.

Excluding charges related to payroll tax on stock options exercised by employees, acquisitions and other nonrecurring items, Cisco’s earnings were $1 billion, or 14 cents a share, up from $163 million, or 2 cents, a year earlier.

On that basis, the company beat analysts’ average estimate by 2 cents, according to Thomson First Call.

The results, announced after the close of regular trading, sent Cisco shares as high as $13.12 in after-hours trading. The stock closed at $12.07, up 71 cents, in regular Nasdaq trading Tuesday.

“Given an extremely challenging market, [the fourth quarter] was a very solid quarter for Cisco,” Chief Executive John Chambers said during a conference call with analysts.

However, he added, “it’s unclear whether our growth is due to market share gain or is an indication of where the market is going.”

Cisco’s market share has grown 12% over the last year, whereas the combined market share of its 10 biggest competitors has declined 44% during the same period, Chambers said.

Chet White, senior equity research analyst for Wells Fargo Securities in Los Angeles, said Cisco’s gains came only partly at the expense of rivals.

Spending by big business customers has boosted sales at Cisco and rivals such as Foundry Networks Inc. and Extreme Networks Inc. But Cisco’s gains in sales to telecommunications service providers have meant losses for equipment providers such as Nortel Networks Corp., Alcatel and Lucent Technologies Inc., said White, who does not own any Cisco shares. Cisco is not a Wells Fargo client.

For the full fiscal year, Cisco said its net income was $1.9 billion, or 25 cents a share, contrasted with a loss of $1 billion, or 14 cents a share, for 2001. Sales for 2002 were $18.9 billion, a 15% decline from the $22.3 billion in sales for 2001.

Chambers said Cisco’s sales would pick up after the economy as a whole rebounds, though he declined to make any predictions about how soon that might happen.

“Today’s economy is a show-me economy, and CEOs will wait to spend until they see their own revenue and profits pick up,” he told analysts.

“While no one can say when the economy will turn around, when it does turn around, so will network spending.”

A survey released Tuesday by Forrester Research offered hope that the turnaround is underway.

The Cambridge, Mass.-based technology research and consulting firm predicted that corporate spending on information technology will rise 2.3% this year compared with 2001.

Of the 1,001 North American companies surveyed, 82% said their IT budgets will at least hold steady for the rest of the year, with 19% saying they will boost spending. Only 12% of firms surveyed said they planned to cut their IT budgets in the second half of the year.

Although some investors have called for companies--especially technology titans such as Cisco--to include expenses related to stock option grants in their profit and loss statements, Chambers said he has no plans to move such expenses out of the footnotes in Cisco’s financial reports.

The most prominent method for calculating the costs related to stock options doesn’t give investors an accurate picture of their true costs, he said.

“We don’t want to create additional problems in terms of understanding the financials that are involved,” Chambers said. “I applaud the people who say, ‘Let’s study this carefully and not just jump into this.’ ”

Chambers also ended speculation on Wall Street by naming Dennis Powell, Cisco’s vice president for corporate finance, as heir apparent to longtime Chief Financial Officer Larry Carter, “unless he messes it up.”

Cisco has no debt and has amassed a pile of cash and investments worth $18.3 billion under Carter’s leadership.

Over the weekend, Carter declared his intention to retire in May on his 60th birthday. Chambers said he would try to persuade Carter to stay. But when Carter steps down, Powell will replace him.

In the fourth quarter, Cisco took a one-time charge of $28 million to write off some of its research and development costs. That amounts to less than a penny per share.

Cisco also said it boosted the amount of money earmarked for stock buybacks to $8 billion, up from the $3 billion approved last September.

Of that $8 billion, which can be spent through Sept. 12, 2003, about $2 billion has been used to buy back Cisco shares, Chambers said.