Cisco Q2 profit up on lower revenue

Cisco Systems Inc.’s net sales fell slightly in the company’s 2003 second fiscal quarter from both the year-earlier and previous quarters, the company reported Feb. 5. 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 San Jose, Calif. network equipment maker expects revenue in the current quarter to be in a range from flat to down three per cent, 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 per cent from 69.3 per cent the prior quarter, and net income totalled 22.9 per cent of net revenue, well above the company’s goal of 20 per cent, 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 per cent from the previous quarter, 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 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 Corp. 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 per cent to about 60 per cent, he said. One reason has been Cisco’s ability to migrate advanced features such as Layer 3 switching, management tools and IP telephony from more expensive products into its lower end offerings, he said.