Cisco Sees Hint of Fragile Tech Upturn [WSJ 10.6.03]
By SCOTT THURM
Cisco Systems Inc. offered tentative signs of a tech and telecom rebound, with a 76% increase in fiscal first-quarter net income and its highest quarterly revenue in nearly three years.
Still, much of the revenue increase could be traced to an acquisition and strong spending by the federal government. Cisco said orders trailed shipments in the quarter, suggesting that technology remains far from the go-go days of the late 1990s. "While things are starting to look better, it is still fragile," Chief Executive John Chambers told analysts.
For the three months ended Oct. 25, the San Jose, Calif., maker of computer-networking equipment reported net income of $1.09 billion, or 15 cents a share, compared with net income of $618 million, or eight cents a share, in the same period a year earlier.
Revenue increased 5.3% to $5.1 billion from $4.8 billion, topping Cisco's projections and analysts' estimates. The quarterly revenue was Cisco's highest since the quarter ended January 2001, around the time that corporations started slashing tech spending.
The results sent Cisco shares up more than 5% after hours, to $22.99, according to Island ECN. In 4 p.m. trading Wednesday on the Nasdaq Stock Market, Cisco shares rose 22 cents to $21.80, a 52-week high.
Cisco offered slightly more bullish comments about corporate technology spending than other tech titans, such as International Business Machines Corp., Microsoft Corp. and Intel Corp. Even where they posted strong results, executives of those companies said last month they hadn't seen signs of a rebound in corporate tech spending.
"We are seeing increased business optimism," Mr. Chambers said. "The recovery appears to be slowly gaining momentum."
Still, Mr. Chambers said orders from U.S. corporations didn't change significantly from the prior quarter, although they were up roughly 5% from the first quarter last year. Chief Financial Officer Dennis Powell said Cisco's order backlog had declined slightly since early September.
For the current quarter, which ends in January, Mr. Powell said Cisco expects revenue to increase 1% to 3%, compared with the latest quarter. That would put Cisco's revenue up 10% on an annual basis, the fastest rate since the tech boom.
Perhaps the biggest surprise was a significant increase in orders from telecommunications companies, which rose 10% compared with the prior quarter and 20% compared with the year-earlier quarter. "It could be a very interesting start" of a recovery, Mr. Chambers said. Telecom spending plunged beginning in 2000 because of the glut of optical fiber installed in the late 1990s, and hasn't recovered since. Telecom companies account for about one-quarter of Cisco's revenue.
Some of Cisco's revenue growth could be traced to special factors that don't reflect corporate-spending trends. The first quarter included $119 million in revenue from Linksys Group Inc., the maker of consumer-networking equipment that Cisco acquired in June. Also, Cisco said the federal government accounted for more than 20% of sales to U.S. businesses, up from the prior quarter.
Overseas, orders grew strongly in Asia, particularly Japan and China. Orders from Europe declined, as they typically do during the summer.
At the same time, Cisco's profit margins declined slightly. Gross margin, or profit before operating expenses, fell to 68.7%, from 69.9%, primarily because of the smaller profits associated with Linksys's cheaper consumer gear. Operating expenses increased slightly, because of the additional Linksys employees, and higher sales commissions.
Cisco said it generated roughly $1 billion in cash from operations, down from $1.5 billion in the prior quarter, because of bonus payments linked to the end of Cisco's fiscal year. Cash and liquid investments slipped to $19.7 billion, from $20.7 billion in the preceding quarter, as Cisco bought back $2 billion of its shares.
Cisco had been expected to record a roughly $400 million expense for stock options granted to employees of Andiamo Systems Inc., an in-house start-up that Cisco has said it will acquire sometime before July. However, accounting rule-makers postponed the effective date of a new rule that would have forced the disclosure.
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