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Cisco Touts Optical Upside In Q3 Results

Light Reading
News Analysis
Light Reading
5/10/2000

LAS VEGAS, NV -- In announcing financial results for the third fiscal quarter of 2000, Cisco Systems Inc. http://www.cisco.com officials played up growth in optical networking, saying it would contribute at least another $1 billion to the company's top line during the next four quarters.

Nearly all of the growth in Cisco's optical networking line is coming from products originating at Cerent, the company it bought in a stock and cash deal valued at $7 billion. Two of Cisco's other optical acquisitions, Monterey Networks and Pirelli Optical Systems, have yet to contribute significantly to the company's revenues or profits.

Overall, Cisco's quarter was a strong one. Net sales for the third quarter of fiscal 2000 were $4.92 billion, compared with $3.17 billion for the same period last year, an increase of 55 percent. Pro forma net income--which excluded the effects of acquisition charges, payroll tax on stock option exercises, and gains on minority investments--was $1.03 billion, or $0.14 per share, compared with pro forma net income of $649 million or $0.09 per share for the third quarter of fiscal 1999, increases of 58 percent and 56 percent, respectively.

The reported earnings of $0.14 per share exceeded both the consensus analyst estimates of $0.13 and the so-called "whisper number" of $0.12--the amount anticipated by Wall Street as reported by WhisperNumber.com http://www.whispernumber.com.

The announcement comes after Cisco's stock slid 10 percent following Friday's announcement that it would buy ArrowPoint Communications Inc. http://www.arrowpoint.com for $6 billion in stock. Contributing to the recent decline in the stock were concern about dilution in Cisco's stock from the ArrowPoint acquisition, general softness in technology shares, and a critical article about Cisco stock published over the weekend in the financial paper Barron's http://www.barrons.com.

However, the investment community appeared to be buoyed by Cisco's earnings announcement. On Tuesday, Cisco shares remained unchanged at $62.75. Following the release of results, analysts on the conference call generally applauded new measures of growth and Cisco stock was trading up as much as $1 in after-hours trading on the Island ECN (Electronic Communications Network) http://www.island.com.

Cisco CEO John Chambers said the company would be able to sustain a revenue growth rate of between 30 percent and 50 percent annually for the "next couple of years." He also noted that newer growth areas such as optical networking and wireless infrastructure would give the company the opportunity to improve on that growth rate, "if the company executes properly."

In the optical area, Cisco sold over $200 million worth of Cerent gear during the third quarter. The Cerent sales represented 60 percent sequential growth over the second quarter of fiscal year 2000, and Mr. Chambers said Cerent products would account for $1 billion in revenue in the next year.

"Cerent has proven to be the cornerstone of Cisco's optical strategy," said Mike Volpi, Cisco's chief strategy officer.

In fact, critics note, Cerent is actually the only stone of Cisco’s optical push. It’s the only optical acquisition bearing fruit for the networking giant. Revenue from two other optical networking acquisitions--Pirelli Systems and Monterey Networks--has yet to develop. Cisco officials said they had signed agreements for roughly $30 million in revenue from the Pirelli products during the third quarter, but that revenue was not collected in time for the reported results. Officials said they do not expect to see any revenue from Monterey's products until the first or second quarters of fiscal year 2001, which begins in August.

That may be an over-optimistic estimate. Cisco plans to ship the Monterey device are currently being challenged by a lawsuit brought by Alcatel http://www.alcatel.com, alleging theft of proprietary information, is resolved (see Cisco Snagged in French Suit).

"Cerent is making a killing, but with Monterey and Pirelli, it's too early to tell," says Truc Do, a senior analyst with Wit Soundview.

Others claim that Cisco is exaggerating its revenues from carrier equipment. "They may report a lot of carrier revenue, but a lot of it comes from including income from carriers that are reselling their enterprise equipment," says Ed Ogonek, executive vice president for the switching and routing product group at Newbridge Networks. "Cisco's not there in the carrier market. There are two protagonists in the US: Nortel and Lucent," he adds.

-- R. Scott Raynovich, Executive Editor, Light Reading http://www.lightreading.com

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