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Optical/IP

Cisco Holds the Line

In reporting its results for its first fiscal quarter of 2004, Cisco Systems Inc. (Nasdaq: CSCO) said enough to make the optimists happy -- but left just enough doubt to feed the pessimists' fears.

“What we could be seeing here are early signs of marketshare gains or increased service provider capex spending in the U.S. and global markets," Cisco CEO John Chambers said. "But only time will tell if this momentum will continue.”

Chambers noted that Cisco saw both sequential and year-over-year growth in the mid-single digits for the first time in over two years.

The stock rose this morning, after last night's better-than-expected report. Cisco was trading up $0.93 (4.27%) to $22.73 during the early hours.

Cisco competitors Extreme Networks Inc. (Nasdaq: EXTR), Foundry Networks Inc. (Nasdaq: FDRY), and Juniper Networks Inc. (Nasdaq: JNPR) were up marginally on the news. Extreme was up $0.06 (0.61%) to $9.81; Foundry was nearly flat, up $0.01 (0.04%) to $25.00; and Juniper was up $0.09 (0.47%) to $19.10.

For the first fiscal quarter of 2004, Cisco posted revenues of $5.1 billion, compared to $4.7 billion in the fourth quarter of fiscal 2003 and $4.8 billion for the same period a year ago. Analysts expected the company to bring in $4.85 billion in revenue. The company’s guidance at the end of last quarter was in the range of $4.80 billion to $4.89 billion.

Cisco reported a profit of $1.1 billion or $0.15 per share ($0.17, excluding one-time items), compared with $982 million or $0.14 per share for the fourth quarter of fiscal 2003. The company made $618 million or $0.08 per share for the first quarter of fiscal 2003.

For the second fiscal quarter of 2004, the company predicts to grow 1 to 3 percent from the first quarter, and it hopes to see year-over-year growth of 10 percent. Gross margins are expected to be between 67 and 69 percent.

The company maintained its relatively high gross margins, but they did fall about 1 percent to 68.7 percent. The company attributed this decline to pricing pressure due to the new home networking product line from Linksys.

Analysts greeted the news warmly, impressed that Cisco was able to increase profits and deliver a small amount of growth.

“We believe that Cisco’s October quarter results reflect ongoing recovery in the networking industry,” writes Erik Suppiger and John Mark Duncan, analysts with Pacific Growth Equities Inc. in a note published this morning. “And we feel that other vendors are benefiting from the market’s improvement.”

Chambers noted improvement in the company’s service provider business, which was up 10 percent sequentially. The strength in this sector was led by North American carriers and the high-end core routing product category. Half of the growth came from service providers increasing capacity, the other half from new network builds. Chambers also noted that sales of Cisco’s high-end router, the GSR, grew 20 percent.

“It’s good to see that carriers are spending,” says Stephen Kamman, an analyst with CIBC World Markets. “On the other hand, carriers have all said they are cutting capex again. So whatever they are spending on IP is coming out of someone else’s budget. That’s good news for Cisco and Juniper, but it doesn’t mean recovery for the sector overall.”

Cisco also saw strength in Japan, which was up sequentially 25 percent, and Asia overall, up 15 percent. Within Asia, revenues in China jumped 30 percent, reversing a two-quarter slowdown.

The company also saw growth in its advanced product category, which includes optical networking, IP telephony, storage, wireless, security, and home networking. It was up to 17 percent of product revenue from 14 percent of product revenue last quarter. The company cited strength in optical networking and IP telephony, but noted weakness in storage area networking. Chambers said that sales of its Andiamo switches did not meet targets due to manufacturing, supply issues, and a lengthened sales cycle.

— Marguerite Reardon, Senior Editor, Light Reading

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