02/06 23:51
Cisco Fiscal 2nd-Quarter Net Falls 24% as Sales Drop (Update6)
By Scott Lanman


San Jose, California, Feb. 6 (Bloomberg) -- Cisco Systems Inc., the largest maker of equipment to link computers, said fiscal second-quarter earnings dropped 24 percent on lower customer demand. The shares fell as much as 8.9 percent in after- hours trading.

Chief Executive John Chambers said on a conference call that orders weren't coming in as fast as Cisco was shipping products. Third-quarter revenue will be unchanged or rise by a ``very low single-digit'' percentage from the previous period, Chief Financial Officer Larry Carter said.

``We still have limited visibility over the short term,'' Chambers said on the call, citing ``conservatism'' in customers' hiring and computer-equipment budgets. ``Traditionally the third quarter has been a seasonally challenging one for Cisco.''

Second-quarter net income declined to $660 million, or 9 cents a share, from $874 million, or 12 cents, a year earlier. Revenue fell 29 percent to $4.82 billion from $6.75 billion in the period ended Jan. 26, beating forecasts of $4.55 billion. Chambers cut 6,200 jobs last year and reshuffled his top managers amid Cisco's first losses and sales slump as a public company.

The latest period's results represent the second straight quarter-to-quarter increase in sales and profit, excluding certain items. The San Jose, California-based company increased its store of cash and investments to $21 billion from $19.1 billion. Cisco has a market value of $136.5 billion.

Cisco shares rose 11 cents to $18.61 on the Nasdaq Stock Market and dropped as low as $16.95 after Chambers acknowledged that orders were rising more slowly than revenue. The shares had declined 48 percent in the past year.

In Asia, shares of Datacraft Asia Ltd. and Venture Manufacturing Singapore Ltd. declined. Datacraft, which has set up a quarter of Asia's computer networking systems, has an agreement where it will use Cisco equipment unless customers ask for another supplier. Datacraft shares fell as much as 7 cents, or 3.1 percent, to $2.20.

Venture, Singapore's largest maker of electronics for brand name companies, which was named Cisco's ``preferred manufacturer'' in Asia, dropped 70 cents, or 4.7 percent, to S$14.20.

Above Estimates

Excluding acquisition-related expenses, payroll taxes on stock options and an excess inventory benefit in the latest quarter, profit would have dropped to $664 million, or 9 cents a share, from $1.33 billion, or 18 cents, a year earlier.

On that basis, which doesn't conform to generally accepted accounting principles, the company was forecast to generate profit of 5 cents a share, the average estimates of analysts polled by Thomson Financial/First Call.

``If there was anything that maybe caused consternation, it was the fact that they still have very low visibility,'' said Ray Hirsch, head of technology-stock investing at American Express Financial Advisors, which manages $253 billion and held 54.5 million Cisco shares as of Sept. 30. Today's report was ``75 percent good news and about 25 percent bad news,'' Hirsch said.

Confusion Over Revenue

Shawn Campbell, telecommunications-equipment analyst at Northern Trust Corp., said the shares fell because some investors were confused over the breakdown of Cisco's revenue by product line, given by Carter during the call.

Revenue from routers, switches and Internet-access equipment was little changed or down from the previous quarter, while Cisco recognized more revenue from deferred sales, Campbell said.

``It kind of takes a little shine off the quarter,'' Campbell said. Northern Trust manages $330 billion in assets and held 54.5 million Cisco shares as of Sept. 30. ``Larry Carter did not explain it well.''

Campbell said Cisco probably isn't using any accounting tricks to hide bad news.

``Companies that have accounting problems aren't generating cash like this,'' he said.

Investors said Chambers' moves are paying off as Cisco, a bellwether for technology companies and the economy, rebounds as it takes sales from rivals.

Analysts expect third-quarter revenue of $4.65 billion, up 2.2 percent from their second-quarter average estimate, according to First Call surveys.

Excess Inventory

Cisco has used or disposed of all except $139 million of the $2.25 billion in excess chips and parts that the company wrote off in the fiscal third quarter of 2001, Carter said.

The earnings report followed a limited disclosure this morning that Cisco exceeded analysts' forecasts for sales and profit in the second quarter and that product orders totaled $3.9 billion, more than the company's forecast of $3.75 billion.

The company issued the statement after an unidentified Cisco executive last night inadvertently told as many as 12,000 employees in an e-mail about the orders and characterized the second-quarter results in ``positive terms.''

Products, Services

In the second quarter, Cisco had $4.02 billion in product revenue and $794 million in services revenue. Product revenue in the year-earlier period totaled $6.06 billion, while services revenue was $684 million.

Cisco employed 36,786 people at the end of the quarter, a decline of 760 from three months earlier. Chambers said in an interview that Cisco will ``continue to allow our headcount to come down gradually through voluntary and involuntary attrition.''

On the conference call, Chambers estimated Cisco gained 2 to 3 percentage points of market share from Juniper Networks Inc. during the quarter in revenue from high-speed routers to direct Internet traffic. In the third quarter of calendar 2001, Cisco held 65 percent of the market, and Juniper had 32 percent.

The company had $136 million in pretax costs in the latest period for amortization of purchased intangible assets; $46 million for amortization of deferred stock compensation; and $3 million for payroll taxes on stock options exercised in the second quarter. It also had a $195 million pretax gain for using the inventory it had previously deemed worthless


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