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Cisco delivers in 3Q
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May 9, 2000: 8:38 p.m. ET
Computer networking gear maker sneaks by estimates; sales up 55 percent
By Staff Writer Richard Richtmyer
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NEW YORK (CNNfn) - Cisco Systems on Tuesday turned in a fiscal third-quarter operating profit of 14 cents per share, slightly ahead of Wall Street's forecasts.
And executives said they see continued long-term growth in the markets they serve. But they warned that as demand for Cisco's products continues to swell, a supply shortage of the components the company uses to make them could weigh on its bottom line in the near term.
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CNNfn's Bruce Francis reports on Cisco Systems' latest quarterly earnings.
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Before one-time charges, Cisco, the world's leading supplier of data-networking equipment, posted an operating profit of $1.03 billion, or 14 cents per share, in the quarter ended April 29.
Analysts polled by earnings tracker First Call had expected Cisco (CSCO: Research, Estimates) to turn in a profit of 13 cents per share.
The most recent period marks the ninth quarter in a row the San Jose, Calif.-based company has beaten per-share estimates by exactly a penny. It was also the first time the company reported a 10-figure operating earnings number.
"We are very happy to be reporting that our pro-forma earnings passed the $1 billion mark for the first time," John Chambers, Cisco's president and chief executive, said in a conference call with analysts Tuesday.
 During the quarter, the company's enterprise business line showed particular strength, with a 20 percent sequential increase in bookings, Chambers said.
Strong sales to both telecommunications companies and Internet service providers also helped lift the company during the quarter, which is typically the company's weakest, according to Chambers.
"Given our size and the fact that the third-quarter has historically been the most challenging quarter, we were very pleased with the results," he said.
Including one-time items, Cisco's net income for the quarter was $662 million, or 9 cents per share, an increase from $636 million, or 9 cents per share, a year ago.
Meanwhile, net sales rose 55 percent to $4.92 billion from $3.17 billion last year. Analysts had expected to see a sales increase closer to 48 percent.
Cisco shares teetered in and out of negative territory Tuesday, ending the session unchanged at 62-3/4. Shares edged up 13/16 to 63-9/16 in after-hours activity on MarketXT.
Click here to see which stocks are moving in after-hours trade
The company's stock was beaten up on Monday, sliding 7 percent after a report published in financial newsweekly Barrons brought the company's sky-high valuation and its aggressive acquisition strategy into question.
 Even so, Cisco shares have soared more than 130 percent over the past year, as the company continues to lock in to the growing market for the equipment that corporations and governments need to build out their Internet infrastructures.
"Globally, business and government leaders are beginning to dramatically transform their traditional business models into Internet economy business models," Chambers said. "Customers are increasingly seeking Cisco's expertise to help them through this transformation."
And as the company has moved ahead with its business, investors have flocked to it, sending the value of its stock soaring. With a total market capitalization of roughly $435.3 billion, it now jockeys with General Electric (GE: Research, Estimates) for the title of the world's most valuable company.
The Barrons article suggested that Cisco's stock may have been artificially inflated because it has relied too heavily on acquisitions to fuel its growth.
Though Cisco executives did not directly address the issues raised in that piece, some analysts said the most recent quarter's results disprove that theory.
"Essentially, what they argued is that Cisco has grown through acquisitions, and people are valuing it at a very high price because of its growth," said Paul Johnson, an analyst at Robertson Stephens.
"But Cisco has not grown through acquisitions," Johnson added. "They've grown despite their acquisitions. The primary growth, as we saw in the quarter, was clearly from routers, which is Cisco's historical product."
Network routing systems accounted for 41 percent of Cisco's revenue for the quarter, and 39 percent was derived from switching products, the company reported.
Analysts cheer; executives eye long term growth
Initial reaction to Cisco's earnings release was positive.
"They did it again; it's amazing," said Martin Pyykkonen, an analyst at CIBC World Markets. "Based on what I see right now, there's nothing I can find fault with in this report."
"This was absolutely an upside surprise based on reasonable expectations," said Stephen Koffler of First Union Securities. "It was a great quarter, extremely balanced in every way."
Executives remained upbeat about Cisco's long-term growth potential, expecting it to keep pace with or exceed the industry's growth rate of between 30 and 50 percent.
"We see no major changes in that model for the next several years," Chambers said. "In fact, we are more optimistic about Cisco's position and opportunities in both the enterprise and service provider markets than at any point in the last several years."
However, Chambers warned that as its networking equipment continues to grow, the companies that supply Cisco with the components used to build them have been struggling to keep up.
And that poses one of the company's biggest challenges as it moves ahead with its aggressive growth plans, he said.
"While each of our opportunities has good upside potential, we all need to understand that with this increased level of investment, an order surprise or an inability to meet shipment requirements due to supply constraints could have a negative impact on our bottom line as we would not be able to react quickly to scale back expenses," he said.
Chambers also said that the company will maintain its "healthy paranoia" about the rapidly expanding field of competitors in the market for data networking gear, and characterized the company's major challenges over the next several years as being a result of the size and number of new opportunities in that market.
"That's obviously a good problem to have," he said. 
-- Reuters contributed to this report
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