Cisco beats expectations on strong enterprise sales, but yearly revenues slide UPDATED 6:30 PM

August 6, 2002

3 Min Read
Cisco Beats the Street, Ups Repurchase

Cisco Systems Inc.'s (Nasdaq: CSCO) fourth-quarter profits rose substantially from a year ago, fueled by stronger enterprise equipment sales. The company's revenues also rose sequentially from the last quarter, though they are still 15 percent lower than those from the year-ago period (see Cisco Reports Q4).

The results reported Tuesday for the quarter ended July 27 were above expectations. In trading ahead of the news, shares of Cisco ended the day up $0.69 (6%) to $12.05.

Cisco reported pro forma earnings of $1 billion, or 14 cents a share, on revenues of $4.8 billion. Using generally accepted accounting principles (GAAP), Cisco earned $772 million, or 10 cents a share during the quarter.

Analysts were expecting Cisco to report pro forma earnings of 12 cents a share on revenues of $4.9 billion for the quarter, according to a survey by Inc. While Cisco beat the earnings per share estimate, it fell just short of the quarterly revenue guess.

On its earnings conference call, Cisco CEO John Chambers remained concerned about service provider spending worldwide: "There's a good chance there may be a continuing wave of [service provider] capex reductions worldwide."

Still, Chambers remains bullish on Cisco's chances in the service provider equipment market. "We are uniquely positioned in the industry, if we continue to execute properly, to become the number one or number two player in the service provider market."

The company also announced it would increase its stock repurchase program to a total of up to $8 billion through September 12, which is $5 billion more than it initially announced in September 2001. To date, the company says it has repurchased about $2 billion in shares.

For its fiscal year 2002, Cisco reported revenues of $18.9 billion, a 15 percent drop compared to fiscal 2001. Cisco's GAAP earnings for fiscal 2002 were $1.9 billion or 25 cents a share. Its pro forma earnings for the period were $2.9 billion or 39 cents a share. Those numbers are lower than fiscal 2001, in which Cisco reported pro forma earnings of $3.09 billion, or 41 cents a share, on revenues of $22.29 billion. With all charges added in, however, Cisco actually lost $1.01 billion, or 14 cents a share for that fiscal year.

All eyes have been on Cisco this week, since the company's earnings report is seen as an indicator of the general health of the networking and telecom sectors. Adding to the attention were rumors that Cisco's chief financial officer, Larry Carter, was getting set to retire (see Cisco Looking at Maffei?). The company said Carter may retire next year.

Despite buying two startups during the quarter, Cisco's overall headcount dropped 369 to 35,566, according to Carter.

Cisco's gross margins improved again during the quarter to 67.7 percent of revenues, up from 63.1 percent in the prior quarter. Analysts say several things contribute to this, including cheaper components; better outsourcing contracts; and outsourced engineering, which leads to more efficient operations.

However, some investors were skeptical of Cisco's numbers. One hedge fund manager, asking to remain unnamed, said he didn't understand how the company was expanding profit margins with revenues growth remaining relatively flat.

The difference in the equation may come down to the finer points of accounting. After taking a $2.2 billion writedown on the value of its unused inventory more than a year ago, Cisco avoided some smaller inventory charges against earnings going forward. Cisco continues to sell the inventory it wrote down last year, and the results of those sales are reflected in its GAAP earnings, the company says, not its pro forma numbers.

— Phil Harvey, Senior Editor, Light Reading

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