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Cisco Profit Rises but Sales Decline for the Second Straight Year

Investors concerned about the tech firm's future earnings send its shares down 6% in after-hours trading.

August 06, 2003|Joseph Menn | Times Staff Writer

Cisco Systems Inc. on Tuesday reported an increase in quarterly profit, but investors concerned about the company's declining sales sent stock in the dominant maker of Internet traffic computers down 6% in after-hours trading.

San Jose-based Cisco said it earned $982 million in its fiscal fourth quarter, or 14 cents a share, up 27% from $772 million, or 10 cents, a year earlier. Sales fell 3% to $4.7 billion from $4.8 billion.

For the year, Cisco earned $3.6 billion, or 50 cents a share, compared with $1.9 billion, or 39 cents, in fiscal 2002. Sales of $18.9 billion in fiscal 2003 were off 0.2% from the prior year, the second straight year of declines.

Cisco shares, which had fallen 40 cents to $18.86 in regular Nasdaq trading, slumped to $17.80 following the report.

Chief Executive John Chambers said that the company had boosted profit by cutting jobs and other expenses, but that future earnings increases would depend on higher sales.

Although Cisco executives projected a sales increase of just 2% to 4% in the current quarter, Chambers said he was more optimistic about the state of the economy than he has been in two years.

"We are starting to see early signs which could be interpreted, with the proper caveats, as cautiously optimistic," Chambers said.

He said he expected a recovery in capital spending to begin in small and mid-sized U.S. firms. "As our customers' business improves, so will our business," Chambers said.

Some investors sold shares because they had been hoping for stronger projections, Lehman Bros. analyst Tim Luke said. "Clearly, there were fairly high expectations. Management is increasingly optimistic, and that's encouraging."

Others said they were concerned that earnings per share have been the same in each of the last three quarters.

Because many costs already have been taken out of the business, "the gross margins may have peaked," said C.E. Unterberg, Towbin analyst Mark Sue.

Having captured a majority share of the world markets for Internet switches and routers, Cisco is turning to newer offerings that it believes can bring in $1 billion a year in revenue apiece.

Of the current crop, Internet telephone equipment, optical products and storage are growing the fastest.

So far, that strategy has been paying off, Chambers said. The first six of a projected 12 new areas accounted for 17% of Cisco's orders in the fourth quarter.

Chambers said he was pleased with Cisco's market-share gains, increased government sales, stronger revenue from high-end machines and most other aspects of the quarter -- with the "obvious exception" of stagnant sales.

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