Cisco Q2 profit up on lower revenue

Cisco Systems' net sales fell slightly in the company's 2003 second fiscal quarter from both the year-earlier and previous quarters, the company reported Tuesday. However, net income was up and beat analysts' estimates on a pro forma basis.

Cisco reported net income of US$991 million, or $0.14 per share, on net sales of $4.7 billion in the quarter. That compares with net income in the company's fiscal second quarter of 2002 of $660 million, on net sales of $4.8 billion.

Pro forma net income was $1.1 billion or $0.15 per share, compared with pro forma net income of $664 million or $0.09 per share for the second quarter of fiscal 2002. These figures exclude certain items such as amortization of deferred stock-based compensation and of intangible assets.

Analysts polled by Thomson Financial/First Call had expected the company to report pro forma earnings per share of $0.13 on revenue of $4.7 billion. Cisco's fiscal second quarter ended Jan. 25.

The network equipment maker expects revenue in the current quarter to be in a range from flat to down 3 percent, according to Chief Financial Officer Larry Carter, who spoke during a conference call following the earnings announcement.

The weak economy continued to hold back customer spending, Cisco President and Chief Executive Officer John Chambers said on the call. He called it a "show me" economy, in which enterprises are waiting until their revenue and profits pick up before investing in network products. In fact, Cisco is seeing more conservative attitudes now than one quarter ago, and orders from enterprises in the first three weeks of January were weaker than expected, he said.

Potential customers' "visibility" -- their ability to predict their conditions in the future -- in some cases is becoming more limited, he added. Political and economic uncertainties around the world continue to have an effect, he said.

However, Chambers applauded the company's handling of things it could control. Cisco's overall gross margin increased to 70.4 percent from 69.3 percent the prior quarter, and net income totaled 22.9 percent of net revenue, well above the company's goal of 20 percent, he said. This was despite price reductions in nine out of 10 of Cisco's product lines over the past several months, he added.

"While there is always room for improvement, we are pleased with how we've positioned the company for the inevitable economic upturn," Chambers said.

One strong product in the quarter was the high-end Cisco 12000 Series, for which sales of new chassis grew about 20 percent from the previous quarter, he said.

U.S. bookings made up 45 percent of Cisco's total in the quarter, while Europe, the Middle East and Africa accounted for 31 percent, according to Cisco. Bookings in the Asia-Pacific region made up 12 percent, Japanese bookings were 7 percent and bookings in parts of the Americas outside the U.S. were 5 percent. Chambers called the distribution fairly typical for the season.

The enterprise business in the U.S. was a bit weaker than had been expected, he said. The company saw good quarter-over-quarter growth in Europe and made gains in selling to national carriers there. Japan showed growth in both enterprise and service-provider orders. Asia-Pacific has been Cisco's most predictable market over the past year, and orders grew in China, Hong Kong, Taiwan and India, Chambers said.

The earnings announcement took place after the close of the Nasdaq, where Cisco's stock (CSCO) is traded. In the after-hours market, the stock had lost just over 1 percent to hit $13.06 a few hours after regular trading had closed, according to the Island trading network.

In answer to an analyst's question on the call, Chambers and other executives echoed the CEO's comment on a conference call last month that Cisco is looking to start competing more aggressively on the low end of the networking market. New, low-priced competitors such as Dell Computer recently have moved into the market.

Cisco already sells products for small and medium-sized businesses, though it is has a bigger presence among medium-sized companies than on the low end of that segment, said Charlie Giancarlo, senior vice president and general manager of switching, voice and carrier systems at Cisco. The small-office and home-office business has grown significantly in the past few years, he pointed out.

"Up until recently it wasn't a very big business and therefore was probably something we weren't missing much by not focusing on. Today I think it's safe to say it's a very significant business, and we have been studying it and are considering a renewed emphasis on it," Giancarlo said in a phone interview following the conference call.

Competition on the low end is nothing new for Cisco, Giancarlo said, recalling that the company has had rivals in the area of stackable Ethernet switches for many years. Yet in the past approximately four years, Cisco has boosted its market share in that category from about 20 percent to about 60 percent, he said. One reason has been Cisco's ability to migrate advanced features such as Layer 3 switching, management tools and IP (Internet Protocol) telephony from more expensive products into its lower end offerings, he said.

The earnings announcement took place after the close of the Nasdaq, where Cisco's stock (CSCO) is traded. In the after-hours market, the stock had lost just over 1 percent to hit $13.06 a few hours after regular trading had closed, according to the Island network.

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