Cisco shows improvement but sales still slow

Still hurting from a tough economic climate and relatively slow IT spending, Cisco Systems saw a slight uptick in sales for the quarter ending Oct. 27, but overall revenue and profits were well below year-earlier numbers, the company reported after the Monday market close.

The network equipment giant reported US$4.4 billion in revenue for the period. This marks a 3 percent sequential increase over the previous quarter, though it is markedly below the $6.5 billion in revenue for the same quarter last year. Net income for the vendor totaled $332 million, for earnings per share of $0.04, excluding unusual charges. These figures compare with $1.4 billion in net income or $0.18 per share in last year's first quarter, the company said in a statement.

Analysts polled by Thomson Financial/First Call had estimated Cisco would report earnings, excluding charges, of $0.02 per share for the quarter.

Although Cisco's results beat analysts' estimates and improved sequentially from the previous quarter, the company actually lost money when all charges were taken into account. Including charges related to acquisitions, investments and inventory costs, the company reported a net loss of $268 million or $0.04 per share.

Although the service provider segment remained flat in the first quarter, the government, retail and health care markets showed signs of increased spending, President and Chief Executive Officer John Chambers said, in a Monday conference call with press and analysts.

The company also pointed to a few bright spots outside the U.S., saying the Sept. 11 attacks in the U.S. affected sales more dramatically here than abroad.

"Our business outside of the U.S. continues to meet and occasionally exceed expectations," Chambers said during the conference call.

Sales in Northern Europe, the U.K., Canada and Mexico were strong in the quarter, Chambers said.

Chambers expressed some optimism in his remarks but projected flat to slightly positive revenue figures for the upcoming quarter. Chambers said he doubts any more layoffs will be necessary if current market conditions hold. The company's work force declined by 553 employees in the fiscal first quarter.

The company looks for industries such as data storage and wireless technology to help drive demand for its networking products while the service provider and optical technology segments remain weak.

The networking giant has fallen hard since the first quarter of fiscal 2001. As late as December 2000, Chambers was expressing optimism that the company's annual revenue growth of more than 50 percent would continue despite a weak telecommunication and Internet services business. However, as service providers ran into dire financial straits, sales in that segment plummeted. In February this year, Cisco reported that sales to service providers had dropped 40 percent in the second fiscal quarter ended Jan. 27.

In late August, in what it called a bid to better deal with consolidation in the communications industry, Cisco's management reorganized the company into 11 technology-based groups. The company had been divided into three large groups tied to lines of business: service providers, large enterprises and commercial, which included small and medium-size businesses.

Although some analysts see brightening prospects for Cisco's corporate network equipment business, most do not expect the telecommunication and Internet services industry to start recovering until at least the middle of next year.

The company's prospects are mixed, said Nikos Theodosopoulos, an analyst at investment bank UBS Warburg Ltd., in New York, in an interview last week.

"The enterprise business in the U.S. has improved and the service provider business continues to be challenging," he said. Moreover, corporate purchases of network equipment have not yet turned the corner in Europe, he added.

In Asia, China remains a strong point for networking sales but the rest of the region is still fairly weak, Theodosopoulos said.

It is too early to say whether Cisco's recent reorganization will help the company, he said.

Shares of Cisco (CSCO) moved higher during Monday's trading on the Nasdaq exchange, gaining almost 4 percent to a close of $17.90. In the after-hours markets, investors appeared pleased with Cisco's results, sending the company's stock up more than 8 percent to $18.72 on the Island ECN online exchange, at the time of this report.

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