Cisco posts profit, cuts rev guidance

By Ben Klayman

CHICAGO: Cisco Systems Inc., the No. 1 maker of equipment that directs Internet traffic, swung back to a quarterly net profit from a year ago but issued a cautious revenue outlook, sending its shares down in after-hours trading.

Cisco executives said revenue in its fiscal second quarter, ending in January, would be flat to down as much as 4 percent from its first quarter as customers react to an increasing inability to predict business by slashing spending. Some analysts and investors had hoped Cisco, seen as a key benchmark for the health of U.S. corporations, would forecast flat to higher sales in its second quarter, historically a strong period for the industry.

Cisco's stock fell to $12.70 in after-hours trading on Instinet, after initially rising as high as $13.90 on the first-quarter results. The stock closed Wednesday before the news at $12.96 on Nasdaq. "What they reported was a fairly sober picture going forward. They're making the best of a less-than-rosy marketplace," said Barry Jaruzelski, a partner with management consulting firm Booz Allen Hamilton.

He added, however, that Cisco's strong gross profit margins show the San Jose, California-based company is not sacrificing pricing as it picks up market share. "What they're doing in the networking space is analogous to what Dell is doing in personal computers," Jaruzelski said. "They are taking share more rapidly in the downturn that they were taking in the upturn."

Cisco posted a first-quarter net profit of $618 million, or 8 cents a share, compared with a net loss last year of $268 million, or 4 cents a share. Excluding one-time items, it earned $1 billion, or 14 cents a share, compared with $332 million, or 4 cents a share, in the year-ago quarter.

Analysts were expecting Cisco to earn 13 cents a share before one-time items on sales of $4.81 billion, according to Thomson First Call.

Revenue could decline

Revenue in the quarter ended Oct. 26 rose 9 percent to $4.8 billion from $4.4 billion last year. Sales were even with the $4.8 billion reported in the previous quarter and in line with Cisco's forecast in August despite weaker-than-expected business in September.

Cisco Chief Executive John Chambers told Reuters that customers' ability to predict business is getting tougher, but he feels good about Cisco's position in the market. "This coming year will be a battle for share of (the customer's) wallet," he said in a telephone interview. "We think we've positioned ourselves pretty well."

However, Chief Financial Officer Larry Carter said on a conference call that he expects sales in the second quarter to be flat to down 3 percent to 4 percent from the first quarter. Analysts were expecting Cisco to report a second-quarter profit before one-time items of 13 cents on revenue of $4.89 billion, according to First Call.

"The issues here are macroeconomic. Until you see a recovery in (information technology) spending, I wouldn't expect the stock to make a sustained move about $15 a share," said Shawn Campbell, analyst with Northern Trust Corp.'s asset management arm, whose firm owns 54 million Cisco shares.

Cisco expects to have a gross margin of 66 percent to 68 percent in the second quarter, Carter said, and the company will continue to generate $300 million to $400 million per month in cash. The first-quarter gross margin was 69.3 percent.

Customer caution

Cisco said larger corporate customers, also called enterprise customers, were spending cautiously, while the telecommunications segment continues to see lower spending amid the downturn. Enterprise customers account for about 80 percent of Cisco's revenue, with telecom making up the rest. Chambers said he expected capital spending in the beleaguered telecom sector would continue to decline.

"There continues to be a good chance that there will be waves of (capital spending) reductions from the global service providers," he said on the call. "Those waves start in the U.S. and are working their way around the world."

Cisco's first-quarter results included a noncash $412 million impairment charge on certain publicly held equity securities in its investment portfolio. So far this year, the stock has fallen 28 percent, far less than the 57 percent decline by the American Stock Exchange Network index, an industry benchmark.

(With additional reporting by Duncan Martell)

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