Cisco tops revised estimates, income plunges

Cisco Systems edged past Wall Street's revised estimates when it reported third-quarter earnings on Tuesday, but noted that its net income plunged 77 percent and sales fell 4 percent from the same quarter a year ago in the face of a slowing market for networking hardware.

For the third-quarter 2001, Cisco reported net income of US$230 million, or $0.03 per share, excluding a host of charges, compared to net income of $1 billion or $0.13 per share for the third quarter of fiscal 2000.

Net sales for the quarter fell to $4.73 billion, compared to $4.93 billion for the same period last year.

Thirty analysts polled by Thomson Financial/First Call expected Cisco to report earnings of $0.02 on sales of $4.7 billion. Analysts lowered estimates in April from $0.08 per share after Cisco warned of its third-quarter shortfall, and said changes in the global economy would continue to lower its quarter-over-quarter results through the end of the fiscal year.

"What we all witnessed is not only the speed at which these changes can occur but that the peaks will be much higher and the valleys much lower than almost all of us had anticipated," said Mike Volpi, Cisco's chief strategy officer, in a conference call Tuesday.

Company executives said they see some positive signs that the industry will hit bottom and rebound within the next few quarters, but made no promises.

"What we have clearly seen is the speed at which this new economy can change in both directions," said Cisco Chief Executive Officer John Chambers. "Things could get tougher before they improve, especially outside the U.S."

Fourth-quarter results will be sequentially flat to down 10 percent from the current quarter, executives said. However, that depends on a number of factors, including continued action by the U.S. Federal Reserve to cut interest rates, U.S. consumer spending not deteriorating any further than current levels and capital spending recovering in Asia-Pacific and Europe.

"In the short-term, visibility going forward is more difficult than we've ever seen," said Chambers. "It would not be a big surprise to see our growth on either side of this range."

Cisco stayed firm with its long-term guidance of a 30 percent to 50 percent revenue growth rate over the next three to five years in more stable countries such as the U.S. Countries with marginal economies could show revenue growth of less than 30 percent, and in countries with more "serious issues," Chambers said, the company could see decline.

Without subtracting its one-time costs, actual net loss for the third quarter was $2.69 billion or $0.37 per share, compared with actual net income of $641 million or $0.08 per share for the same period last year. Those write downs include acquisition charges for the purchases of Active Voice Corp., Radiata Inc., and ExiO Communications Inc. totaling $621 million, payroll tax on stock-option exercises, restructuring costs of $1.17 billion from a recent round of layoffs, an excess inventory charge and net gains realized on minority investments.

While most of its charges were expected because Cisco issued early warnings about the quarter, the company revealed just how drastically the industry slowdown has affected network equipment companies from itself to rivals such as Juniper Networks Inc. Charges from leftover inventory in the third quarter totaled $2.2 billion, as its pool of customers diminished from about 3,000 at its peak to about 150 targeted firms due to consolidation and bankruptcies in the industry.

Shares of the networking bellwether closed at $20.38 in anticipation of its earnings announcement Tuesday, gaining $1.13, or 5.87 percent, in trading.

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