Cisco Posts Profit, Cautiously Eyes Rebound

By Colin C. Haley

August 05, 2003

The network equipment giant saw profits rise and revenue slip slightly, as industry-watchers look for signs of a broader recovery.

Cisco Systems said its net income rose but revenue fell slightly during the fourth quarter as it continued to operate in a challenging network equipment market.

CEO John Chambers said he's cautiously optimistic that the long-depressed industry is headed toward recovery, though he declined to predict when. Cisco customers are beginning to consider equipment upgrades, Chambers said.

In addition, small and medium businesses (SMB), a sector Cisco covets, also seems promising, Chambers said. He believes SMBs will emerge first from the the economic downturn, followed by enterprises and service providers.

For the three-month period, the San Jose, Calif., company posted earnings of 14 cents per share on revenue of $4.7 billion, compared to 10 cents per share on $4.8 billion for the same period last year. The results met Wall Street's expectations.

"We are pleased to report another solid quarter in a challenging market," said John Chambers, Cisco's president and CEO, Cisco.

High points included growth in the sale of high-end routers (although this could be because of seasonal differences) and an increase in U.S. sales to 47 percent of overall revenue, up 2 percent as well as an uptick in orders from the federal government.

The revenue figure was disappointing however as service providers continued to be conservative in capital expenses and some overseas markets lost ground. Mid and lower level routers also contributed less than in the past.

There was a time when Cisco's earnings reports were utterly suspenseless. Quarter after quarter the San Jose, calif., the company beat Wall Street estimates by a penny per share -- predictable, plodding, profitable.

Then came the Nasdaq collapse and economic paralysis. Large companies that comprised Cisco's customer list felt pressure to conserve cash and delayed or canceled orders. At the same time, the new business spigot was abruptly shut off as venture-backed startups failed en masse.

Cisco, once considered a "safe" IT play, wasn't immune. Just a year from flirting with $80 per share, the stock plummeted below $20 in early 2001, a level that it's still struggling to hold. The stock was trading at around $19 per share this morning.

So now, with some industry watchers saying the worst is over for the telecom market, all eyes were on Cisco.

Many on Wall Street have been optimistic. Analysts at SG Cowen didn't wait for the results, upgrading Cisco yesterday from "outperform" to "strong buy" and boosting fiscal 2004 earnings estimates from 64 cents to 67 cents per share and revenue from $20.1 billion to $20.5 billion.

Perhaps most important, there is enthusiasm about Cisco's new business lines, which should give it at least a chance to grow again.

Specifically, home networking equipment maker Linksys, which Cisco bought earlier this year for $480 million in stock. Irvine, Calif.-based Linksys targets consumers and small office/home office (SOHO) users.

Home networks rely on wireless technologies, such as 802.11a, b or g, to allow consumers to share files, printers, digital music, photos and gaming, over a wired or wireless local area network. Demand for the systems is increasing as laptops and other devices come preconfigured for Wi-Fi.

Linksys was not in the Cisco fold for the entire quarter, but Chambers said the integration has gone "extremely well."

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