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Cisco Suggests Relaxing, Worrying

By Robert MacMillan
washingtonpost.com Staff Writer
Wednesday, August 11, 2004; 9:46 AM

Don't worry. Worry.

Those three little words are all it takes to interpret Cisco Systems Inc.'s fourth-quarter earnings and outlook for the near future. The company posted a 41 percent increase in profits and a 26 percent revenue rise, but Cisco chief executive John Chambers in several interviews yesterday said that he and his confreres at other tech firms are more cautious on spending and the overall economy than they were just a few months ago.

The Wall Street Journal provided a picture of Cisco's immediate future: "The San Jose, Calif., maker of computer-networking equipment said it expects revenue in the current quarter ending in October to increase 2 percent or less from the just-completed quarter ended July 31. That is slightly less than the 3 percent quarter-to-quarter revenue increase projected by Wall Street analysts surveyed by Reuters. Mr. Chambers said the subdued forecast primarily reflected seasonal patterns, including slow summer sales in Europe."

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And here's a peek at the most important numbers. Fourth-quarter profit was $1.38 billion (20 cents a share), compared to $982 million (14 cents a share) in the same quarter last year. Revenue was up to $5.93 billion from $4.7 billion. Those numbers beat Cisco's forecast by a hair -- the company had predicted $5.9 billion in revenue. The company's yearly net income rose 23 percent to what the Journal said was a record $4.4 billion, while revenue was up 17 percent to $22.05 billion.

Cisco's share price is down more than 10 percent so far today, falling $2.12 to trade at $18.34 shortly after the opening bell, the Associated Press reported.
The Wall Street Journal: Cisco Posts Higher Net, Revenue But Sees Slower Tech Spending (Subscription required)
Associated Press via washingtonpost.com: Cisco Shares Fall on Business Doubts (Registration required)

Chambers had similar words for his interview with Bloomberg: "Most CEOs I talk to have put a little bit of caution on their optimism and termed it 'moderate growth.'" Bloomberg also ran this interpretation from analyst Susan Kalla at Friedman Billings Ramsey in New York: "Chambers's tone is very specific. When he says we're seeing a little bit of caution, that's a big deal." David Willis, an analyst at the Meta Group research firm, told the Associated Press that such a move is characteristic of Cisco.

Here's some evidence of that caution. "The earnings news from Cisco, based in San Jose, Calif., comes several weeks after two other technology industry bellwethers, IBM and Microsoft, each posted solid quarterly results. However, their reports were also tempered, with Microsoft remaining cautious in its own outlook and IBM reporting that it had noticed some pause in corporate technology spending," the New York Times reported.
The New York Times: Cisco Reports Strong Revenue in 4th Quarter (Registration required)
Bloomberg: Cisco Shares Drop After Chambers Says Customers Are 'Cautious'
Associated Press via washingtonpost.com: Cisco Earnings Beat Expectations (Registration required)

The Financial Times offered up some of its own analyst sources, as well as details on what the inventory figures mean to investors. "'Guidance of 0-2 percent is not a disaster by any means, but it was disappointing nonetheless,' said Pamela Hegarty, analyst at Baring Asset Management. Cisco, which makes routers and switches that direct data traffic across the Internet, worried investors by revealing that its inventories grew 9 percent from the prior quarter. Executives said this reflected growing sales, and efforts to sell home networking equipment through retail outlets, but analysts were worried the company could be saddled with excess inventories should economic growth falter. Rising inventories were the first sign of the technology downturn that began three years ago."

The San Jose Mercury News reported that analysts for the most part suggest that investors curb any enthusiasm they might be feeling. "The results from Cisco -- which is seen as a bellwether for the tech economy -- added to the recent malaise about the health of the tech economy. Analysts praised Cisco for performing well in a tough economy, but didn't see a boom coming soon," the paper reported. "'We had gone into this quarter not expecting any fireworks, and that's what we got,' said Stephen Kamman, analyst with CIBC World Markets. He added that Cisco delivered strong results, but was 'not at all willing to stand up and declare the start of the next bubble.'"
Financial Times: Corporate Demand Lifts Cisco Sales
San Jose Mercury News: Cisco Posts Record 41% Profit in Quarter (Registration required)

Investor's Business Daily and several other pubs took a look at the effect of Cisco's numbers on the chief's pay stub. "Other measures show that Cisco is running steadily. Gross margins, profit left after subtracting the cost of making the products, stayed steady at 68%," the paper reported. "The improvement at Cisco will pad Chambers's wallet. His salary has risen from $1 to $350,000 a year. During the 2001 downturn, Chambers took a symbolic salary of $1 a year. Directors have now restored Chambers' salary to 2001 levels. In any case, he makes far more in stock compensation."


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