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Optical/IP

Cisco Stays Cautious

Cisco Systems Inc.'s (Nasdaq: CSCO) stock was trading down in the after-hours market as the company refused to let go of its cautious mood, despite a second quarter of sequentional revenue growth (see Cisco Q2 Profits Rise).

Growth remains in the single-digit realm, and Cisco CEO John Chambers admits the recovery's momentum is "still not as strong as we'd like." It's a coolly measured attitude compared to the euphoria surrounding the Juniper Networks Inc. (Nasdaq: JNPR) earnings call last month (see Juniper Confidently Carries Q4 and En Fuego!).

Chambers said customers are feeling confident that their businesses are recovering, but the optimism is tempered with an "unusual caution on both capex commitments and hiring."

The immediate future won't necessarily see Cisco's numbers skyrocket, either. Cisco is predicting revenue growth of only 1 percent to 3 percent in the current quarter. But that's not too bad, considering the April quarter tends to be Cisco's toughest. At the high end, that would mean revenues of just more than $5.5 billion for the current quarter.

For its second fiscal quarter ended Jan. 24, Cisco reported sales of $5.4 billion and pro forma net income of $1.3 billion, or 18 cents per share. For the same quarter a year ago, Cisco reported sales of $4.7 billion and net income of $991 million, or 14 cents per share (see Cisco Q2 Profits Rise).

Analysts had expected profits of 17 cents per share on revenues of $5.3 billion, according to Reuters Research. That itself was an increase from Cisco's November guidance of $5.15 billion to $5.25 billion.

Net income, according to generally accepted accounting principles (GAAP), was $724 million, or 10 cents per share. Under GAAP rules, Cisco must account for the pending Andiamo spin-in as if Andiamo had been inside Cisco from its inception, in April 2001 (see Cisco Buys Andiamo).

So why the gloom in the after-hours market? Well, Wall Street was most likely looking for some blowout numbers and signs that growth would accelerate. In addtion, the bean-counters may have seen a couple of warning signs in the numbers.

Cisco saw gross margins dropping, to 68.5 percent from 68.7 percent the previous quarter, and its book-to-bill ratio -- the number of future orders compared with those already billed -- stood below 1.0, indicating sales aren't increasing.

Cisco's Days Sales Outstanding (DSOs), a measure of the sales cycle, lengthened considerably to 34 days, compared with 26 days in the prior quarter.

But Cisco did have a few perky bits of news from the quarter.
  • High-end routers did particularly well. Revenues and bookings for the 10000 series were up 100 percent from last quarter, while revenues and bookings for the 12000 series were up 50 percent, Chambers said. He admitted that high-end revenues tend to be lumpy from quarter to quarter.
  • Storage, after a "slow start," broke through, Chambers said. Revenues of $40 million were up 120 percent from the previous quarter.
  • Revenues from Linksys, Cisco's wireless LAN play, grew 39 percent to $165 million, aided by the holiday market.
Cisco stock closed up 21 cents at $26.41 today. The stock hit a three-year high of $29.39 recently. In trading after hours, it was down $1.16 (4.39%) to $25.25.

— Craig Matsumoto, Senior Editor, Light Reading

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