Cisco Systems Inc. (Nasdaq: CSCO) today reported its fiscal first-quarter revenues rose 9 percent from a year ago, thanks to more efficient operations and market share gains over its competitors (see Cisco Reports on Q1).

But because of slower capital spending by enterprises and service providers alike, the company says revenues will be "flat to down a little" during its upcoming quarter.

The networking giant reported pro forma earnings of 14 cents a share on revenues of $4.8 billion for the fiscal period ended October 26. During the year-ago quarter Cisco earned 4 cents a share on $4.4 billion in revenues.

Analysts expected Cisco to report earnings of 13 cents a share on revenues of $4.8 billion, according to Multex.com Inc.

Including one-time charges, Cisco's actual net income for the quarter was $618 million or 8 cents a share, compared to an actual net loss of $268 million or 4 cents a share during the year-ago quarter.

In after-hours trading on the Island ECN, Cisco was trading up $0.34 (2.68%) to $13.03. Cisco's stock closed up $0.27 (2.1%) to $12.96 in regular trading on Wednesday. Shares were also helped by the Federal Reserve's half-point interest rate cut. The Fed cut its rate for federal funds -- the interest banks charge each other on overnight loans -- to 1.25 percent, a move that took Wall Street by surprise and boosted all stocks.

We are very pleased with our results in those areas that we can control and influence," says John Chambers, Cisco's president and CEO.

However, after several minutes of hemming, hawing, and generic doubletalk about his outlook on Cisco's business, Chambers finally noted that he thinks revenues for Cisco's second fiscal quarter of 2003 will be "flat to down a little." Larry Carter, Cisco's chief financial officer, defined "down a little" as down three to four percent.

The company blamed "seasonality and tightening visibility" among its customers for its slipping book-to-bill ratio, which dropped below 1. This ratio means the company is booking orders at a slower rate.

Chambers also was cautious about the service provider market. "There continues to be a good chance that there will be waves of capex reductions among the world's service providers."

During the quarter Cisco cut its headcount to 35,278, a decrease of 288.

Going the other way were Cisco's gross margins, which rose to 69.3 percent, up from 54 percent during the year-ago quarter. Larry Carter attributed the increase to falling component costs and the fact that Cisco has consolidated its suppliers to gain additional volume discounts. Also, given Cisco's low inventory, "all new purchases are at current market prices," Carter says.

The company's inventory fell to $828 million from $1.7 billion, and the company ended the quarter with more than $21 billion in cash and investments.

Cisco funded $82 million in commitments to its structured loans during the quarter. The company has $400 million in total loan commitments to its customers, $200 million of which is eligible for drawdown, Carter says.

When one analyst asked about whether Cisco would buy a company the size of Lucent Technologies Inc. (NYSE: LU) or Nortel Networks Corp. (NYSE/Toronto: NT) -- or a portion of either business -- in order to gain share in the service provider market, Chambers replied it was "very unlikely." He says Cisco's acquisition strategy is to "buy smaller companies with geographic proximity, where possible."

— Phil Harvey, Senior Editor, Light Reading
www.lightreading.com