Cisco sees Q1 profit tumble

Ben Klayman

CHICAGO: Cisco Systems Inc.'s fiscal first-quarter profits before one-time

items tumbled 76 per cent on Monday amid a continuing slump in high-tech

spending, but the data-networking bellwether's sales did rise from the prior

quarter, suggesting the worst may be behind the sector.

"Given the very challenging economic and capital spending environment,

we were pleased to deliver a solid quarter with good order linearity, sequential

revenue growth and profitable market share gains," President and Chief

Executive John Chambers said.

The San Jose, California-based company said earnings before a number of

one-time items fell to $332 million, or 4 cents a share, from $1.4 billion, or

18 cents a share, in the same period last year.

Sales for the quarter ending Oct. 31 fell 32 per cent to $4.45 billion from

$6.52 billion last year, but topped Wall Street's and its own expectations. They

also rose from the previous quarter's $4.3 billion, the first time that has

occurred this calendar year.

Analysts had expected Cisco to earn 2 cents a share, with a range of 1 cent

to 3 cents, according to Thomson Financial/First Call. Chambers said last month

he was "very comfortable" with Wall Street's estimates.

Analysts had forecast first-quarter sales of $4.17 billion, while the company

had said in August that sales would be flat to down five per cent from the

fourth quarter.

"The trend line in our mind is clear -- upward and to the right,"

Chambers said of the long-term growth opportunities. Cisco's stock, which closed

up 64 cents, or 3.7 per cent, at $17.90 on Nasdaq before the results were

announced, rose to $18.40 in after-hours trading.

Analysts and investors lauded the stronger-than-expected results. "The

quarter was clearly better than expected," said UBS Warburg analyst Nikos

Theodosopoulos, citing improved revenues, gross margin, lower operating expenses

and a stronger balance sheet.

Cisco increased its cash on hand to $19.1 billion from $18.5 billion at the

end of the fourth quarter.

Q2 sales to be 'flat to slightly up'



Chambers said on a conference call with analysts that he expects fiscal
second-quarter sales to be unchanged to up in the low single-digit percentage

point range from the $4.45 billion in the first period. That said, Chambers

cautioned that demand in the telecommunications and data-networking industries

was hard to forecast right now.

Analysts now forecast Cisco to have second-quarter sales of $3.8 billion to

$4.6 billion, with the mean at $4.25 billion, according to First Call. Per-share

results are forecast at a 3-cent profit, with a range of a 1-cent loss to a

5-cent gain.

Some analysts and investors said Cisco's strong results and its

second-quarter guidance pointed to a bottom in the spending slowdown.

"We're seeing a bottoming out, but I'm not ready to call it a bottom

yet," said Steve Mygrant, portfolio co-manager of the Fifth Third

Technology Fund, which owns shares of Cisco. "I didn't hear anything that

caused me a lot of concern."

He added he will increase his fiscal 2002 earnings estimate for the company

to 21 cents a share from 16 cents. Chambers said the Sept. 11 attacks hurt sales

by about two per cent in the first quarter, and added that second-quarter sales

will be about five per cent less than what the company had been estimating

before Sept. 11.

Since the beginning of the year, the stock has outperformed its peers in the

American Stock Exchange Networking index by about 19 per cent.

Investors had wanted to know whether Cisco's orders had stabilized since the

Sept. 11 airplane attacks, something to which Chambers alluded last month when

he said orders were "remarkably linear" from June through September.

Linearity refers to the smoothness of orders coming in to a company, which

allows a company to run its business with more predictability and ultimately

more profitably, Chambers said.

"You are beginning to see a different behavior in the market that I

would characterize by linearity, and hitting or exceeding expectations for the

strong," he told Reuters. Including the one-time items and in accordance

with generally accepted accounting principles, the company posted a loss in the

quarter of $268 million, or four cents a share, compared with a net income last

year of $798 million, or 11 cents a share.

The results included a noncash $858 million impairment charge on certain

investments, about $189 million for two acquisitions and a $37 million one-time

charge, or about 1 cent a share after taxes, for a write-off of in-process

research and development.

Cisco competitors faring worse



While capital spending among telephone carriers and corporations has been weak
-- hurting larger players like Canadian telecom equipment giant Nortel Networks

Corp. -- smaller networking firms like rival Juniper Networks Inc. and

Riverstone Networks Inc. have provided hope with strong results or forecasts of

growth.

Last month, Nortel posted a $3.5 billion third-quarter loss, and Lucent

Technologies Inc.'s $8.8 billion fourth-quarter loss was its largest-ever loss

in a three-month period and was due largely to restructuring charges.

Also last month, Juniper posted a $29.7 million third-quarter net loss, but

surprised and encouraged analysts with operating results that held steady from

the previous quarter. Riverstone forecast revenue growth next quarter of 8

percent to 10 percent.

Cisco, which employed 37,546 people at the end of October, also said it had

disposed of $834 million of excess inventory during the quarter, making progress

on purging itself of $2.2 billion in excessive parts and components it is

writing off due to weak demand.

(Additional reporting by Duncan Martell in San Francisco)

(C) Reuters Limited