Cisco Misses Estimates, Warns of Flat Revenue
Years of Hypergrowth End Amid Disarray
In Telecom Industry and a Weaker Economy
By SCOTT THURM
Staff Reporter of THE WALL STREET JOURNAL
Cisco Systems Inc., suffering from both disarray among telecom customers and a sharp economic slowdown, missed analysts' consensus targets for fiscal second-quarter results and warned that revenue likely won't grow for the next six months.
The results conclusively ended three years of Internet-fed hypergrowth for the San Jose, Calif., maker of computer-networking equipment, and marked the first time in almost seven years that Cisco failed to meet analysts' expectations. Cisco had exceeded analysts' published earnings estimates by precisely one penny a share for the previous 14 consecutive quarters.
The results, announced after regular trading hours, sparked a 6% decline in Cisco shares in after-market trading, to $33.56. As of 4 p.m. Tuesday on the Nasdaq Stock Market, Cisco shares were up $1.19 at $35.75.
Net Income Rises 7%
Cisco reported net income of $874 million, or 12 cents a diluted share, for the three months ended Jan. 27, up 7% from net of $816 million, or 11 cents a share, in the same period a year earlier. Excluding acquisition-related charges, payroll taxes on stock-option exercises and gains on minority investments, Cisco said it would have earned $1.33 billion, or 18 cents a share, up 48% from pro forma net of $897 million, or 12 cents a share, in the year-earlier period.
Analysts surveyed by First Call/Thomson Financial had expected Cisco to earn 19 cents a share, excluding the adjustments.
Revenue climbed a solid 55% to $6.75 billion, from $4.36 billion in the year-earlier period. But that was about 5% below the First Call consensus revenue estimate of $7.1 billion, which itself had declined in recent days as analysts lowered expectations for Cisco's results.
Sales increased 3.5% from the previous quarter, significantly less than the roughly 10% quarter-to-quarter increase that Cisco forecast in November.
Moreover, Chief Financial Officer Larry Carter told analysts that Cisco's revenue could decline 5% in the current quarter, ending in April, compared with the just-completed second quarter.
For the following quarter, ending in July, Mr. Carter said Cisco expects its revenue to be roughly equal to the current quarter.
Rising Expenses
With expenses still rising, the slowing sales will hurt Cisco's earnings. Paul Sagawa, at Sanford C. Bernstein & Co., said Cisco's guidance points to earnings of 65 cents a share for the fiscal year ending in July. Analysts had been expecting Cisco to earn 77 cents for the fiscal year, according to First Call. Indeed, the results harbored few bright spots for Cisco. Profit margins declined, largely because Cisco expanded its manufacturing capacity based on robust sales in November. Inventories grew by $600 million for the second consecutive quarter, and are now double their level of just six months ago. The growing inventories suggest Cisco may soon have to cut prices, which would damage future results. And, accounts receivable grew much faster than sales, suggesting that Cisco's vaunted sales force struggled to record sales in the closing days of the quarter. Mr. Carter said profit margins would likely decline, and inventories grow, again in the current quarter.
In a conference call with analysts, Cisco Chief Executive John Chambers called the results "mixed," saying the quarter proved "even more challenging than we anticipated." Still, Mr. Chambers said he is "cautiously optimistic" that the economy, and Cisco's business, will rebound in the second half of the year.
The weakness was widespread, but most pronounced in Cisco's sales to telecommunications carriers. Mr. Chambers said orders from upstart carriers, who are having trouble raising money, fell 40% in the second quarter, compared to the first quarter.
Falling Sales to Dot-Coms
At the same time, some large manufacturing companies are "cutting budgets and hurting our revenues," Mr. Chambers said. He said Cisco's sales to auto makers over the next six months likely will be $100 million less than Cisco projected just a few months ago. Sales to dot-coms are falling to half last year's levels, and one-third of Cisco's projections. And spending by businesses on high-tech gear "could get worse before it starts to improve," Mr. Chambers said.
So far, Cisco executives said, the slowdown appears confined to the U.S. Orders from outside the U.S. increased to 51% in the second quarter, from 48% in the fiscal first quarter.
"Momentum in international markets has continued unabated," said Kevin Kennedy, Cisco's senior vice president for telecommunications carriers.
The speed of the reversal in Cisco's fortunes is startling. As recently as November, Cisco urged analysts to increase their financial targets for the current fiscal year. Then, in two January speeches, Mr. Chambers said Cisco's business had slowed significantly in mid-December. Many analysts trimmed their forecasts for the remainder of the fiscal year, but few anticipated Tuesday's results.
Hiring Freeze Imposed
In response, Cisco has imposed a hiring freeze, cut discretionary spending and slowed new commitments by its financing arm. Still, Cisco added more than 4,000 employees, to 43,000 in the second quarter, and expects to add as many as 2,000 in the current quarter, from commitments made months ago.
The rising payroll and rising inventory prompted some analysts to question how well Cisco is reacting to the slowdown. "I was shocked by the inventory," said Nikos Theodosopoulos of UBS Warburg.
Mr. Chambers said Cisco reacted very quickly, once it saw the magnitude of the slowdown. "When you're driving a race car at 65 miles per hour and you're trying to accelerate, it takes a while to brake," he said in an interview.
Write to Scott Thurm at scott.thurm@wsj.com |
