Csco Bad News?
August 5, 2000
Cisco's Quarterly Profit Seen Falling on
Acquisition Expenses
By BLOOMBERG NEWS
an Jose, California, Aug. 5 -- Cisco
Systems Inc., the No. 1 maker of
Internet equipment, is expected to
report lower fiscal fourth-quarter net income
because of acquisition costs. Revenue rose as
much as 54 percent, analysts said.
Net income is expected to fall as low as an
estimated 6.5 cents a share from 9 cents a
year earlier. Excluding acquisition- related
expenses, profit rose to 15 cents from 10
cents a share, the average estimate of analysts polled by First
Call/Thomson Financial. Cisco expects to record acquisition costs of as much as
8.5 cents a share for the period ended July 29.
Revenue climbed 47 percent to $5.22 billion, the average estimate of
five analysts polled by First Call, though forecasts range as high as $5.49
billion. The growth, fueled by surging demand for Internet capacity, are coming
from sales of corporate- network switches, high-capacity data-traffic routers,
fiber-optic gear and equipment for high-speed Web access, analysts said.
"The question is, what does revenue growth come in at and what is their
guidance going forward?" said Walter Casey, an analyst at Banc One
Investment Advisors, which owned about 20.4 million Cisco shares as of
June, according to Bloomberg records.
Cisco will report results on Tuesday after the close of the Nasdaq Stock
Market. The San Jose, California-based company, considered a technology
bellwether by investors, typically exceeds the average profit estimate by a penny
a share. Analysts expect that to happen this time, too.(TST)
Growing Demand
Cisco shares rose 1 3/16 to 65 9/16 on Friday. They're little changed in
the past six months on concern that at 123 times expected fiscal 2000 profit, the
shares are overvalued, analysts said.
"The label of 'priced to perfection' is accurate," said CIBC World
Markets analyst Martin Pyykkonen, who rates Cisco a "buy." He doesn't expect Cisco
to warn that future profit will lag estimates and said demand from
telecommunications companies for Internet equipment made by Cisco and others is
accelerating.
"They've delivered nothing short of perfection in results," Pyykkonen
said.
Cisco's sales growth has increased for nine straight quarters. The
company needs at least $5.516 billion in fourth- quarter revenue to match or top
last quarter's 55 percent revenue growth rate. Sales were $3.56 billion a year
earlier.
Working in Cisco's favor are strong quarterly revenue gains, reported
last month, at Nortel Networks Corp. and smaller rivals like Juniper Networks
Inc., analysts said.
They and Cisco are benefiting from demand for Internet capacity that
executives said is doubling every six to 12 months. Analysts said Cisco's rivals
haven't been able to grab significant market share from Cisco because industrywide
sales are increasing so fast.
In addition, reorganizations at 3Com Corp. and Cabletron Systems Inc.,
which have been slimming their product lines, benefited Cisco, said Sanford C.
Bernstein & Co. analyst Paul Sagawa, who rates Cisco stock an "outperform."
Profit Margins Fall
Profit margins fell in the quarter because of the increased sales of
products to telecommunications companies, a more competitive market, analysts
said.
Cisco dominates in sales of gear to corporate customers, though sales to
telecommunications companies this year will surpass revenue from corporate
customers for the first time in company history, said SG Cowen analyst Christin
Armacost, who rates Cisco a "strong buy."
Cisco Chief Executive John Chambers gave several clues to the company's
fourth-quarter revenue in a May 9 conference call to discuss third-quarter
results, analysts said. On Thursday, a Cisco spokeswoman said the company's
guidance hasn't changed.
During the call, Chambers highlighted order growth from the previous
quarter in several major product lines.
Among them are some lines of Catalyst data-traffic switches, with sales
up 40 percent and running at $3 billion annually; the 12000 GSR high-capacity
routers that compete with Juniper's products, up 60 percent and running at $2
billion annually; and equipment that provides fast Internet access over cable and
phone lines, up 20 percent and at $1 billion a year.
Cerent Acquisition
Cisco's acquisition of Cerent Corp. for $7.15 billion last November also
is paying off, analysts said. Third-quarter orders for Cerent's fiber-op product,
which helps parcel out Internet capacity to businesses, rose 60 percent from the
second quarter and "should hit the $1 billion run rate next year," Chambers said
on the May call.
Cowen analyst Armacost estimated that Cerent contributed about $180
million to $200 million in sales in the fiscal fourth quarter. Cerent had revenue
of $9.9 million in the first half of calendar 1999.
Cisco is taking charges to write off research and development from four
purchases in the quarter: Qeyton Systems AB, as much as 5 cents a share; JetCell
Inc., as much as 1.5 cents; and as much as a penny a share each for Atlantech
Technologies and Pentacom Ltd.
Year-earlier results are restated to reflect the acquisitions of
StratumOne Communications Inc., TransMedia Communications Inc., Cerent and WebLine
Communications Corp. Last year's earnings per share are adjusted for a 2-for-1
stock split in March. |
