Cisco's profit slides

May 8, 2001: 6:37 p.m. ET

Network-equipment vendors sales, earnings tumble from year ago

NEW YORK (CNNfn) - Data-networking equipment supplier Cisco Systems on Tuesday logged a quarterly profit that slightly beat lowered expectations and stood by its previous revenue forecast for the current quarter.

At the same time, executives at Cisco in San Jose, Calif., said they expect the slowdown in capital spending, which has weighed on their business in recent months, may bottom out in the next three-to-six months.

"We do see a number of positive indications that could result in a bottom in our segment of the industry being reached for capital spending in the next one-to-two quarters," John Chamber's, Cisco's chief executive, told analysts during a teleconference late Tuesday.

He qualified that statement by telling them that expectation was based on assumptions that: the capital spending slowdown will stabilize at current levels in regions outside the United States; the Federal Reserve will continue to aggressively reduce interest rates; and "the U.S. government will enact meaningful tax reductions retroactive to January."

Excluding one-time charges, Cisco said it earned $230 million, or 3 cents per share, during its fiscal third quarter ended April 28. That compares with a profit of 14 cents per share during the same quarter a year earlier and is a penny more than the 2 cents per share analysts had expected.

At $4.73 billion, Cisco's third-quarter revenue fell 3 percent from the $4.9 billion in sales it reported during the year-ago quarter and was 30 percent below the $6.75 billion it reported in the fiscal second quarter.

Cisco's third-quarter gross margin, the percentage of sales remaining after subtracting product costs, fell to 54.5 percent from 61.8 percent in the previous quarter.

Larry Carter, Cisco's chief financial officer, attributed that decline to an unfavorable product mix, lower shipments, revenue deferrals and higher discounting.

On April 16, Cisco warned the Street that it expected its fiscal third-quarter revenue to be roughly 30 percent below the $6.75 billion it reported in the previous quarter and earnings per share to be "in the very low, single-digit range."

At that time, the company also said it had expected to record a charge for excess inventory of about $2.5 billion during the third quarter. As it turned out, the inventory write-down was $2.2 billion. Carter attributed the lower-than-expected charge to the "conservative nature" of its initial forecast.

Including the inventory charge and other charges related to acquisitions and restructuring, Cisco's net loss for the third quarter was $2.69 billion, or 37 cents per share. That compares with a net profit of $641 million, or 9 cents per share during the same quarter a year earlier.

Looking ahead, Chambers told analysts to expect the company's revenue in the fiscal fourth-quarter to be flat-to-down 10 percent from the third quarter's level, reiterating the forecast he provided when the company warned of the shortfall in April.

After rising $1.11 to $20.36 on Nasdaq ahead of the earnings news, Cisco shares fell 59 cents to $$19.79 in extended hours trade.

Cisco is the leading supplier of the networking equipment, such as routers and switches, which is used to guide traffic over the Internet, controlling about 70 percent of that market.

With the explosive growth of the Internet, Cisco had been on a growth tear in recent years. But as the U.S. economy has slowed, so has Cisco's growth. The company has pinned the blame for much of its trouble on telecommunications service providers in the United States who, in the face of a slowing and uncertain economy, have either deferred or canceled many of their new-equipment orders.

Cisco also sells products to large companies for their corporate network infrastructures, referred to as "enterprise customers."

As have many of its counterparts in the high-tech industry, Cisco has announced major cost-cutting efforts, including plans to cut as many as 8,500 jobs, or roughly 16 percent of it total workforce, by July. Executives said they set the job cuts because of the continuing slowdown in the U.S. economy and signs of economic softness expanding to other regions as well.

Carter said the company expects that those layoffs will be completed by the end of the fourth quarter, leaving the company with roughly 38,500 employees.

Opinions on Wall Street about the once high-flying company have been mixed lately.

Morgan Stanley Dean Witter analyst Christopher Stix on Tuesday upgraded his rating on Cisco's shares to "outperform" from "neutral" ahead of the earnings report. In a note to clients, Stix, whose more cautiously optimistic comments about Cisco's enterprise business sparked a rally in its shares last week, said there are growing signs that Cisco's core business is improving as well.

"Positive news flow from Cisco's carrier business surfaced last week with two wins from China Telecom and Global Crossing," Stix said. "We believe the company is beginning to regain momentum in the core router business. In our view, Cisco can stabilize this business over the next several quarters."

Stix stressed that his call on Cisco was not to suggest that Cisco would exceed expectations for the third quarter or that its results will improve materially in the current quarter. He said he does not expect the company to begin showing quarter-over-quarter revenue growth until the end of 2001 or early in 2002.

At the same time, Michael Perica, an analyst at Gruntal & Co., downgraded his rating on Cisco shares to "market performer" from "market outperformer," saying he does not believe the stock deserves a higher valuation and "the likelihood of a rebound in business over the next four quarters remains low."