Investors Sell the Cisco News

In reporting its fiscal fourth quarter ending July 26, Cisco Systems Inc. (Nasdaq: CSCO) met analyst expectations for revenue but fell slightly short on profit.

Other lukewarm signals about future growth appeared to spook investors trading in the stock in the after-hours market. Shares in Cisco dropped 6 percent in heavy post-close trading.

The company reported net sales for the fourth quarter, which ended on July 26th, of $4.7 billion. This was slightly up from analyst estimates of $4.66 billion, according to First Call. Revenues were also up from the $4.6 billion reported in the company's third fiscal quarter of 2003.

Profits continued to grow, though not quite at the rate that analysts had forecast. Cisco reported fiscal fourth-quarter net income of $982 million or $0.14 per share, on a generally accepted accounting principles (GAAP) basis. This compares with $772 million or $0.10 per share for the fourth quarter of fiscal 2002 and $987 million or $0.14 per share for the third quarter of fiscal 2003. Analysts were looking for $0.15 per share.

A big question leading up to the call was how much the company's June acquisition of Linksys would add or subtract from its financial results (see Cisco Completes Linksys Acquisition). And the answer is: Linksys is contributing a little bit of revenue growth, but pulling down Cisco's profit margins.

The company said that revenues from newly acquired Linksys accounted for about $20 million in the fourth quarter. Most investors had hoped for a larger contribution from the startup this quarter.

The company managed to keep its gross margins relatively high, at 69.9 percent, but that was down slightly from 70.8 percent. The slip in margins was directly related to the Linksys acquisition, according to Cisco officials.

There were other items that the hardcore bean-counters may not like. For example, days sales outstanding (DSO) in accounts receivable at the end of the fourth quarter of fiscal 2003 -- a measure of the sales cycle -- were 26 days, compared with 21 days at the end of the fourth quarter of fiscal 2002. That also compares with DSOs of 23 days at the end of the third quarter of fiscal 2003. Financial analysts generally like to see lower DSOs as a sign that sales are picking up.

Inventories came in at $873 million, that's up slightly from $765 million in the prior quarter. Generally, it's okay for inventories to rise if sales are rising, but Cisco's sales did not grow as quickly as the inventories, indicating that networking gear may be backing up in the sales channel.

On the guidance front, the company expects only modest growth ahead. The company gave guidance of a 2 to 4 percent rise in revenue for its first fiscal quarter (that's the next one), including Linksys revenue of $115 million. Gross margins in are projected to be 67 to 69 percent (with Linksys accounting for a negative 1 percent), said Cisco officials.

Cisco CEO John Chambers did have some good news: He said that federal sales were up last quarter. He also said there is increased confidence from enterprise CEOs. North American sales also picked up in the fourth quarter. And service provider sales increased in the single digits during the quarter.

Chambers said the company saw sequential growth in the high-end router market, but he reminded investors on the earnings call that these orders can often be lumpy. He said that mid and low-end routers were weaker than he had expected. Optical sales were up 40 percent sequentially.

— Marguerite Reardon, Senior Editor, Light Reading

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