Cisco falls short

February 6, 2001: 7:45 p.m. ET

Company misses Wall St. forecasts for first time in nearly seven years
By Staff Writer Richard Richtmyer

NEW YORK (CNNfn) - Cisco Systems shocked Wall Street Tuesday when it reported quarterly earnings that fell shy of expectations, the first miss for the No. 1 maker of data network equipment in nearly seven years.

And executives at Cisco backed off their previous aggressive revenue-growth targets, encouraging analysts to be "more conservative" in setting their estimates for the company over the next two quarters.

The company's top executives revealed that Cisco's annual revenue growth will be roughly 40 percent, well below the Street's most recent expectations for growth nearer 55 percent. The company also expects a sequential revenue decline in the current quarter, compared with recent expectations for a slight increase.

"Our overall guidance is to be more conservative in the third and fourth quarters," said Cisco president and chief executive John Chambers. "We expect a much wider range of estimates."

Chambers made those comments during a teleconference Tuesday evening after the company reported its fiscal second-quarter results.

Chambers told CNN's Moneyline as the econonomy starts to expand, the company will get closer to its historical growth range. (530K WAV and 530K AIFF)

For its second fiscal quarter ended Jan. 27, Cisco logged a profit of 18 cents per share, excluding extraordinary charges. That's up from 12 cents per share during the same period a year earlier but is a penny less than the 19 cents-per-share profit analysts had expected the company to report, according to a survey conducted by earnings tracker First Call.

At $6.75 billion, Cisco's revenue also fell short of the $7.2 billion analysts had expected, according to the First Call survey.

Shares of Cisco (CSCO: Research, Estimates), which were the most actively traded on Nasdaq, rose $1.19 to $35.75 ahead of the earnings news, which was released after the close of trading. But they fell $2.12 to $33.62 in after-hours trade.

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Cisco, the No. 1 supplier of networking equipment such as routers and switches which guides data traffic over the Internet, is the second-largest company listed on Nasdaq, in terms of its market capitalization. And its latest earnings report has been one of the most hotly anticipated this earnings season.

During its 11 years as a publicly traded company, Cisco has rarely missed earnings targets, and over the past several years it has been a Wall Street darling as it consistently posted stellar revenue and earnings growth.

In each of the past 14 quarters, Cisco has beaten the Street's consensus estimate by exactly a penny. And it has not missed forecasts since its third and fourth quarters in 1994, according to First Call, which tracks corporate profits and Wall Street forecasts.

But the comfort with which investors historically have awaited Cisco's quarterly results was this time replaced by anxiety, which has been building in recent weeks amid mounting evidence of a slowdown in the company's end markets and cautious remarks from Chambers.

Lucent Technologies (LU: Research, Estimates) and Nortel Networks (NT: Research, Estimates), two of Cisco's major competitors, each have recently reduced their revenue and earnings forecasts for the remainder of the year, pinning the blame on decreased spending among their telecommunications service provider customers, prompted by the slowing economy.

And in recent public addresses, Chambers had signaled that Cisco has not been immune to the slowdown, saying twice last month that the company's business had been slower than previously anticipated, stressing each time that he expects to see "a wider range of estimates" from analysts, which many have interpreted as meaning a lower range.

During the call, Chambers also pinned the blame for Cisco's weakness on slower telecommunications services provider spending, primarily in the U.S. And he said he expects that weakness to persist at least through the first six months of 2001.

"I believe we are in at least a two-quarter slowdown," Chambers said.

In response to the slowdown, which he said became especially evident at the beginning of December, Chambers said Cisco will take a number of steps, including cutting back on the number of people it hires and funneling its resources to higher-growth areas of the company.

"We remain confident about the market opportunity ahead of us over the next three to five years," Chambers said.

"While we remain cautious about the implications of a brief pause in the current 10-year expansion of the U.S. economy, we believe that Cisco has never been better positioned to help our customers solve their two most important business issues: Increasing productivity and creating new sources of revenue," Chambers added.

But in the short term, at least, Cisco finds itself in the company of many other high-tech outfits, most of which have ratcheted down their financial targets for the next several quarters.

Larry Carter, Cisco's chief financial officer, told analysts on the call that Cisco's revenue growth in the fiscal third quarter ending in April will be "flat to down 5 percent" from the fiscal second-quarter's $6.75 billion.

The Street had expected Cisco's third-quarter revenue to rise to about $7.6 billion, according to the analysts polled by First Call. In the fiscal fourth quarter, Cisco is expecting revenue to match the third quarter's level, Carter said.