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Optical/IP

Cisco Sparkles, Investors Pout

offered no major surprises in reporting an upbeat fourth quarter, but the company's stock got stung in after-hours trading.

Investors apparently weren't cheered by Cisco's prediction of a flat or even slightly down first quarter. On a conference call with analysts, John Chambers noted that Cisco's fourth fiscal quarter tends to be strong, making a first-quarter letdown a natural occurence.

In after-hours trading, Cisco's stock was up mildly at first. But it may have been the first-quarter talk that sent the stock down, falling $0.77 (3.9%) to $18.84.

Cisco is predicting October revenues to be flat or slightly lower than its fourth-quarter numbers. If Cisco revenues grow 10 percent compared with October 2004 -- the low end of the company's guidance -- its October 2005 revenues would be $6.57 billion, compared with the $6.63 billion analyst estimate reported by Thomson First Call.

"I don't see Q1 as weak, it's just weaker versus Q4," Chambers said on the conference call. Possibly realizing that gap existed, Cisco CFO Dennis Powell issued a plea for analysts to cool down their predictions, which lately have exceeded Cisco's guidance. Powell asked that analysts "be conservative in modeling our future performance."

For its fourth quarter, which ended July 30, Cisco reported net income of $1.5 billion, or 24 cents per share, on revenues of $6.6 billion, compared with net income of $1.4 billion, 21 cents per share, on revenues of $6.2 billion the previous quarter.

For its fourth quarter in 2004, Cisco reported net income of $1.4 billion, 20 cents per share, on revenues of $5.9 billion.

Cisco's pro forma results showed net income of 25 cents per share, matching the mean analyst estimate according to Thomson First Call.

The numbers result in fiscal 2005 revenues of $24.8 billion -- up 12.5 percent from the previous year and squarely within Chambers's target range of 10 to 15 percent growth per year. Chambers said he expects Cisco's product revenues to grow another 10 to 15 percent in fiscal 2006

Chambers was particularly pleased with the advanced technologies, six areas where Cisco expects to build $1 billion businesses: wireless, optical, home networking, storage networking, IP telephony, and security. These areas represented some of Cisco's strongest growth all year -- although switching happened to grow faster between the third and fourth quarters -- and Chambers said his goal is to announce "a new advanced technology every three to four months in fiscal year '06."

Speculation is that application-oriented networking (AON) could be one of those additions. The concept, which would make networks more aware of the applications they carry, was launched in June and appears to be a major area of research for Cisco (see Cisco Speaks Applications).

Chambers appeared to take an indirect dig at in the security area, noting that a "peer competitor" with security, routing, and switching in its portfolio appeared to be "relatively flat" in its security business year-over-year. Cisco, by contrast, saw security grow 25 percent compared with last year's fourth quarter.

If there was a weak spot, it was Asia. Revenues from China shrank compared with the third quarter; Chambers noted the country is "uniquely challenging" for Cisco, apparently alluding to the strong presence of Huawei Technologies Co. Ltd., ZTE Corp. (Shenzhen: 000063; Hong Kong: 0763), and other vendors in China. Orders from Japan continued their downward slide, representing 5 percent of revenues versus 7 percent a year ago, Chambers said.

Cisco also sees "possible signs of a slowing in Europe," Chambers said, although he did not give specifics.

— Craig Matsumoto, Senior Editor, Light Reading

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