Cisco Systems Inc. Dow Jones Newswires -- February 2, 1999
Cisco CEO Says Co. Continues To Gain Market Share
By Paula L. Stepankowsky
LONGVIEW, Wash. (Dow Jones)--Cisco Systems Inc. (CSCO) sees some challenges on the horizon in 1999, but overall, Chief Executive John Chambers said he was pleased with how the company performed in the second quarter in a conference call following the company's earnings release after market close Tuesday.
Chambers said while there is some concern about how the Year 2000 computer issue will affect high-tech spending later in 1999, Cisco had its best quarter yet in introducing new platforms. The company also expects to benefit from the growing use of Internet technology to combine voice, data and video in one product.
"Overall, we've never been in a better position to lead in the Internet economy," Chambers said.
The San Jose, Calif., computer networking industry giant reported pro forma net earnings of 36 cents a share for the second quarter of its 1999 fiscal year, excluding a charge. The number came in a penny above Wall Street's consensus estimate of 35 cents a share for the quarter. The company earned 29 cents a split-adjusted share a year earlier.
Net income was $606 million before the change, a 33% increase over $457 million reported a year ago. With the charge, which was related to purchased in-process research and development, net income was $288 million, or 17 cents a diluted share.
Cisco's second quarter revenue was $2.83 billion billion, up 40% from $2.59 billion in the first quarter and $2.02 billion in the year-ago period.
Analysts said the company continued its trend of beating analysts' expectations for earnings and revenue growth for the quarter.
"They've earned their stripes and proved their mettle in the market," said Andy Shopick of Nutmeg Securities. "They've increased their dominance in the areas they've chosen to focus on."
As the largest company that make equipment used to connect computer networks, including the Internet, Cisco's products are in almost every business segment. The company dominates the router business and is a leader in the market for local area networking, or LAN products, which go to enterprise, or corporate, customers.
Cisco continues to expand its presence in the fast-growing wide area networking, or WAN, market, made up of telecommunications companies and Internet service providers. The company's strategy, Chambers said, is to provide end-to-end Internet solutions including data, voice and video integration, in each of the company's key markets.
Cisco itself is getting more orders over the Internet, with 73% of its second-quarter total booked that way, Chambers said.
Cisco CEO Chambers said while the company is seeing growing sales across all its product lines, he has some concerns over the next 12 to 18 months about such issues as continued global economic turmoil and the impact of the Year 2000 problem on high-tech sales.
He said in the second quarter, he was pleased with bookings in all major geographic areas. Europe continued to be a strong center of growth, particularly the U.K. He said, however, he's concerned about Russia and Latin America, particularly Brazil. He added that the company doesn't see the Japanese economy improving before the end of 2000.
"In the short term, the combination of global economic conditions and increased competition will produce more uncertainty in 1999 than we have traditionally seen," Chambers said. "We have a major opportunity coupled with major challenges."
He said it's too soon to predict how sales of networking equipment will be affected by the Year 2000 problem, which is the inability of some computers to recognize years beyond 1999. As companies spend to upgrade computers to make them Y2K compliant, spending on other high-tech equipment may suffer.
"We do anticipate slightly lower expenditures for high-tech hardware until Year 2000 concerns pass," Chambers said.
Stephen Koffler, an analyst with Donald Lufkin & Jenrette said if Y2K is an issue in the networking business, it's likely to be a one-time event.
Chambers also said he expects gross margins, which totaled 65.2% in the second quarter, to continue to narrow as competition increases in the networking industry.
The company's third quarter, which is seasonally the slowest, is expected to be so again this year, Chambers said.
However, Chris Stix, an analyst with S.G. Cowan & Co., said the company manages expenses in line with seasonal expectations in the third quarter, "so we would expect to show earnings perhaps only up slightly in the next quarter."
Chief Financial Officer Larry Carter said the company to date hasn't received any notification from the Securities & Exchange Commission that it should change the way it writes off purchased in-process research and development after it makes an acquisition. The SEC has been mulling a change in the way companies account for that category.
"We believe we have followed all the rules, but we, like all companies, could be reviewed at some time in the future," he said.
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