Cisco Q3 earnings triple, sales edge up

Ben Klayman

CHICAGO: Cisco Systems Inc. the No. 1 maker of gear that directs Internet

traffic, on Tuesday bounced back as cost-cutting efforts boosted its quarterly

earnings to more than triple last year's weak profits, raising hopes a

turnaround could be near.

Shares jumped more than 12 per cent to $14.68 a share in after-hours trading

from their Tuesday Nasdaq close of $13.08.

The San Jose, California-based company said fiscal third-quarter earnings

before one-time items rose to $838 million, or 11 cents a share, from $230

million, or 3 cents a share, in the year-ago quarter. It was the first

year-over-year quarterly gain in more than a year.

Revenue in the third quarter ended April 27 rose 2 per cent to $4.82 billion

from $4.73 billion last year.

Yet even as Cisco's results improved from a year ago, Cisco executives were

still cautious about forecasting revenue and orders too far out into the future,

citing a "show me" economy. Customers won't start ordering more gear

from Cisco and others until they see more definite signs of an economic pick-up

in the United States and other parts of the world.

"Today's economy is truly a show-me economy, meaning the CEOs will wait

to spend until after they see their own revenues and profits pick up," said

chief executive John Chambers told Reuters in a telephone interview.

"The last year has been brutal in our marketplace," he added,

pointing out that while Cisco posted earnings before special items of $838

million, its top 10 rivals lost a combined $1.3 billion. He said on an earlier

conference call with analysts that he expects fourth-quarter revenue to be

"flat with a slight upward bias" when compared to the $4.82 billion it

recorded in the third quarter.

Yet Chambers also provided hope for investors, saying information technology

spending has increased in the retail, education, health care and retail banking

sectors, and is bottoming out in manufacturing.

"Financially they did quite well and in general the tone of the

(analyst) call was better than last quarter," UBS Warburg analyst Nikos

Theodosopoulos said. "There were some lights at the end of the tunnel

here."

Bottom line helped by cost cuts



Including one-time items, net income in the quarter came in at $729 million,
or 10 cents a share, after a net loss last year of $2.7 billion, or 37 cents a

share.

Analysts were expecting Cisco to earn 9 cents a share, with a range of

estimates from 7 cents to 10 cents, according to research firm Thomson

Financial/First Call. Cisco in February reported second-quarter earnings before

one-time items of 9 cents a share on sales of $4.8 billion, and said it saw

third-quarter revenue flat to rising in the "low single-digit" range

from the previous quarter.

"The earnings per share is a cent better, and that's solely to do with

cost cutting," said Justin McNichols, a portfolio manager with Osborne

Partners Capital Management in San Francisco. "Gross margins looked

stronger than we expected. That was a surprise." McNichols said layoffs and

cuts to research and development budgets were two areas where the company cut

expenses.

Cisco cut its work force by 2 percent to 35,935 at the end of April and plans

to cut that total by 1 percent to 2 percent a quarter through attrition and

further cuts, Chambers said.

Rivals see growth in corporate spending



Chambers also said he saw orders in the fourth quarter rising about 5
percent, which he said would be in line with normal seasonal patterns, but he

declined to call a turn in the market. Chief Financial Officer Larry Carter said

he sees fourth-quarter revenue being little changed to rising sequentially by

"very low single-digit growth" levels.

Analysts expect Cisco to post fourth-quarter revenue of $5.05 billion and

earnings per share before one-time items of 10 cents, according to First Call.

While smaller rivals in the enterprise sector recently made positive comments

regarding growth in corporate spending, which makes up most of Cisco's revenue,

the telecom sector keeps struggling as carriers such as SBC Communications and

Qwest Communications International Inc. slash spending.

Unlike rival Juniper Networks Inc., Cisco has not felt the impact of the

declining telecom demand as strongly because that business make up only about 20

percent of its total sales.

Since the start of last year, Cisco's stock has fallen about 66 percent,

slightly outperforming the American Stock Exchange Network Index, which declined

73.6 percent in the same period.

Cisco said its cash pile grew slightly from $21 billion at the end of the

second quarter to $21.06 billion at the end of the third quarter, as it spent

most of the quarter's $1.6 billion in free cash flow. It said it would use cash

for possible acquisitions and more stock buybacks, where it said the pace by the

company would increase.