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Cisco: good Q3, Q4 cautious optimism
With earnings and sales that beat Wall Street estimates, Cisco reassures skittish tech investors.
May 10, 2005: 8:10 PM EDT
By Krysten Crawford, CNN/Money staff writer

NEW YORK (CNN/Money) - International Business Machines is looking more and more like the odd guy out among the tech giants.

Less than a month after IBM (down $1.68 to $73.30, Research) jolted investors with a grim quarterly financial report that fostered worries about a slowdown in technology spending, San Jose, Calif.-based Cisco Systems came out with an earnings and sales report that beat Wall Street estimates.

CEO John Chambers said orders for Cisco products, which include routers and switches that run the Internet and are the company's bread and butter, were strong in the fiscal third quarter that ended April 30.

Chambers told analysts during a conference call late Tuesday that Cisco experienced none of the weakening sales that IBM and smaller technology companies reported in March.

"We didn't see an ugly month," he said.

Cisco shares, which are down six percent for the year, edged slightly higher in after-hours trading Tuesday.

In reporting solid numbers after trading ended Tuesday, Cisco (unchanged at $18.21, Research) helped deliver a trifecta of reassuring technology earnings after IBM's surprise announcement that revenues increased just 3 percent from a year ago thanks largely to the benefits of the weak dollar -- a rate that was exactly half of what analysts predicted. IBM's softness, which raised concerns about a broad economic slowdown, was felt in Europe and Japan.

Since then, however, two other tech giants -- Intel (Research) and Microsoft (Research) -- have assuaged some of the fears with rosy earnings. Dell (Research), the world's largest maker of personal computers, reports Thursday afternoon. Hewlett-Packard (Research) is due to release quarterly earnings next Tuesday, according to

No surprises for Cisco

Chambers said product orders grew steadily each month, reaching more than 2 billion in April for the first time since 2001. In a nod to the struggles Cisco has faced since the technology bubble burst four years ago, Chambers joked that the third-quarter was the first in a while "where, instead of my hair falling out, I actually grew some hair."

Driving the growth were orders for Internet phone equipment and deals with Internet service providers and cable companies. The new revenue streams are encouraging given that Cisco's core router and switches business has matured.

Cisco reported that revenues in the quarter grew 10 percent, to $6.1 billion, compared to the same period a year earlier. Profit for the quarter rose to $1.4 billion, or 21 cents a share, compared with $1.2 billion, or 17 cents a share, in the year-ago period.

Chambers said he was "extremely pleased" with the results and "cautiously optimistic" about the fourth-quarter, in which the company said revenues should fall between $6.56 billion and $6.6 billion, slightly above current Thomson First Call estimates of $6.5 billion.

"While there's always room for improvement," said Chambers, "we were very pleased with our results in what is a seasonally-challenging quarter."

Chambers reiterated the company expects to achieve annual revenue growth of between 10 and 15 percent. Chief Financial Officer Dennis Powell said revenues for the fiscal year that ends in July to come between $24.6 and $24.8 billion, about 12 to 13 percent higher than fiscal 2004 and within the analyst consensus.

"It was a good quarter," affirmed Tim Daubenspeck of Pacific Crest Securities, who echoed the reaction of some analysts who congratulated Chambers and his team during a conference call that followed the earnings release.

The giants flourish, while the smaller fry struggle?

Daubenspeck was encouraged by the company's overall revenue growth, compared to both the preceding quarter and last year's comparable quarter, as well as signs that Cisco's gross margin is holding steady at around 67 percent. Two years ago, Cisco's gross margins were closer to 71 percent.

But even though Cisco edged past forecasts thanks to growth in nearly all of its businesses around the world with the exception of U.S. government spending and the Japanese market, the initial reaction among investors was a giant yawn.

Still, that's better than each of the last two quarters, when Cisco met analyst forecasts and its stock price took a beating as a result. Cisco is a company known to beat Wall Street estimates by at least a penny.

Despite the robust numbers reported by Microsoft, Intel, and now Cisco, Daubenspeck said the technology outlook remains mixed as smaller technology companies like Foundry Networks Inc., a Cisco rival, have floundered recently amid signs of slower spending by large corporate customers.

"Going into the quarter there was a ton of concern because a number of (technology companies) have really struggled," said Daubenspeck. "Everyone assumed that Cisco would see that weakness. But Cisco really didn't see it and appears to have taken market share."

Daubenspeck noted that Cisco shares finished up for their sixth consecutive day as investors realized that "expectations were getting little bit too negative. Two weeks ago everybody was thinking disaster."

While Cisco and its tech peers, IBM aside, have given reasons to calm investor jitters, even Cisco CEO Chambers noted that ongoing economic uncertainty around the world could limit future capital spending by large corporations.

Want to see which technology companies are making waves? Click here.

Daubenspeck does not own shares of Cisco or do investment banking work for the company.  Top of page


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