Cisco Q2 earnings, sales miss expectations

Ben Klayman

CHICAGO: Computer networking giant Cisco Systems Inc. on Tuesday missed Wall

Street's earnings expectations for the first time in more than six years and

forecast slower sales growth due largely to reductions in capital spending by

its US customers.

A softness in orders that began in mid-December continued through January,

Cisco Chief Executive John Chambers said after the biggest maker of computer

networking equipment posted a 48 per cent rise in Q2 earnings and a 55 per cent

jump in sales that still fell short of Wall Street expectations.

"The next several quarters will be challenging," Chambers said on a

conference call plagued by initial technical glitches that disconnected callers

and disrupted the Webcast. Chambers told analysts on the call that they should

be more conservative in their views for the company's fiscal third-and

fourth-quarter results.

Cisco now expects third-quarter sales to be flat, down 5 per cent from the

Q2. This is expected to persist through the fourth quarter, said Chief Financial

Officer Larry Carter on the call. Overall sales for the year ending July 2001

are now forecast to rise about 40 per cent, to about $26.5 billion. These

forecasts, Chambers said, assume the slowdown lasts two quarters and is confined

primarily to the United States.

Sales miss



The San Jose, Calif.-based company said its profit before one-time items
rose 48 per cent to $1.33 billion, or 18 cents a share, for its fiscal second

quarter ended Jan. 27, from $897 million, or 12 cents a share, in the year-ago

quarter. Analysts had on average expected Cisco to report pro forma earnings of

19 cents a share, according to First Call/Thomson Financial.

A company spokeswoman said this was the first time since 1994 that Cisco had

missed a Wall Street consensus forecast for earnings, adding that the company

had never undershot the bottom of the forecast range.

Cisco's sales rose 55 per cent to $6.75 billion from $4.36 billion in 2000,

falling short of Wall Street's expectations of $7 billion to $7.2 billion.

Already, many of its suppliers have warned of a weaker-than-expected first half

of 2001.

"Cisco missed both on revenue and earnings," said Chuck Hill,

research director at First Call/Thomson Financial. Previously, the company had

repeatedly beaten Wall Street estimates by a penny a share.

Chambers had telegraphed to analysts and investors in comments less than two

weeks ago that January's business was "more challenging than we

anticipated," leading many analysts to question whether Cisco's and the

telecommunications industry's growth is slowing.

Including one-time items, Cisco said its net income for the quarter rose to

$874 million, or 12 cents a share, from $816 million, or 11 cents a share, a

year earlier.

In a bid to slash costs and meet a gross profit margin target around 60 per

cent of sales, Cisco said it was scaling back hiring to 1,500 to 2,000 new hires

this quarter, roughly half of the number hired in previous quarters.

Cisco, rivals off in after-hours trading



Cisco stock fell to $33-7/16 on Instinet after closing at $35-3/4, up $1-3/16,
or 3.44 per cent, on Nasdaq. In the past year, the Internet equipment

infrastructure company’s stock had underperformed the Nasdaq 100 Index by

almost 6 per cent.

Other high-tech stocks also faltered, including Cisco's rival Juniper

Networks, at $98-1/8 vs. its close at $102-3/16, pointing to a bumpy ride at the

open on Wednesday, analysts said. Redback Networks, another networking

infrastructure company, fell to $41-1/4 from its close at $42-11/16.

Cisco's results will likely cast a pall on Wall Street on Wednesday, analysts

said. "We'll probably open a little soft because that's the way the market

likes to treat any kind of disappointment," said Ned Riley, chief

investment strategist at State Street Global Advisors in Boston, which manages

$740 billion.

Cisco, which makes an estimated 70 per cent of the world's routers that

direct traffic on the Internet, remained "cautious about the implications

of a brief pause in the current 10-year expansion of the US economy...,"

Chambers said in a statement, adding, "We remain confident about the market

opportunity ahead of us over the next three to five years."

Unsold inventories rise



On the conference call, Cisco executives said unsold inventories rose by
$577 million during its fiscal second quarter. That back-up in inventories came

on top of the nearly $2 billion inventory backlog the company reported for its

fiscal first quarter that ended in October.

Chambers said the inventory build-up came as spending on new technology

slowed dramatically in mid-December and continued to remain soft during through

the end of its fiscal second quarter in January. The sharpest decline came among

customers buying "alternative access" equipment, mainly suppliers of

high-speed Internet access over phone lines that have reported a sharp slowdown

in growth and seen their stock prices plummet.

Executives said they did not expect to return to "more acceptable levels

of inventory" for another two or three quarters. Historically, the company

has managed its product supplies with far lower levels of unsold goods. Accounts

receivable, or product deliveries for which the company is yet to be paid, grew

$625 million to $3.5 billion in the second quarter, the company said, but Carter

added that he was not unduly concerned with that figure.

(C) Reuters Limited 2001.