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=DJ Cisco Keeps Squeezing Higher Profits Out Of Lower Sales

http://www.datekdj.newsalert.com/bin/djstory?StoryId=CpJ9i0aebqLqWmdK3mZC

02/04/2003
Dow Jones News Services
(Copyright © 2003 Dow Jones & Company, Inc.)

By Johnathan Burns
Of DOW JONES NEWSWIRES

NEW YORK (Dow Jones)--Data-networking equipment maker Cisco Systems Inc. (CSCO) saw its net income jump in the fiscal second quarter even as sales dwindled on weak spending among U.S. enterprise customers.

And sales aren't expected to rebound anytime soon, with the company projecting Tuesday that third-quarter revenue could decline as much as 3% from the fiscal second-quarter's $4.71 billion.

"In areas we can control or influence (internally), I continue to be more optimistic going into this quarter than I was going into last quarter," Chief Executive John Chambers said. But, "I am a little bit more cautious than I was last quarter (on external factors)."

After market close, Cisco posted fiscal second-quarter net income of $991 million, or 14 cents a share, on revenue of $4.71 billion, compared with net income of $660 million, or 9 cents a share, on revenue of $4.82 billion a year ago. Excluding items, the company reported earnings of $1.1 billion, or 15 cents a share. On that basis, analysts had expected the company to earn 13 cents a share, according to a Thomson First Call survey. Revenue was lower than the $4.73 billion Wall Street projected.

Chambers, citing the overall economy, a possible war with Iraq and the seasonally weak ongoing quarter, said the company believes fiscal third-quarter sales will be flat to down 3% sequentially, indicating sales could be as low as $4.57 billion. Wall Street expected fiscal third-quarter sales of about $4.76 billion.

The company gave no earnings guidance.

Cisco, like its peers, has seen sales decline since the market frenzy peaked in 2000. However, the company has been able to maintain profitability through job cuts while peers like Lucent Technologies Inc. (LU) and Nortel Networks Corp. (NT) have racked up losses. Cisco also benefits from a diversified customer base, which relies more on enterprise customers than it does on telecommunication carrier spending.

But it was the enterprises - corporations - that caused the company to come in light on sales this quarter.

"CEO's on a global basis continue to operate on a 'show-me' attitude toward the economy and therefore reflect that conservatism in their IT budgets for 2003," Chambers said.

However, Cisco squeezed out its highest gross margin, leading to higher net income, even as sales fell. Gross margin hit 70.4% in the fiscal second quarter and is expected to be between 68% and 70% in the current quarter. Cisco continues to reduce expenses and pressure suppliers for cheaper components.

The company entered the third quarter with a book-to-bill ratio, which serves as an indication of demand, at less than 1.0. A book-to-bill ratio of 1.0 or above is seen as a healthy sign. The company's backlog, though, was above $1.4 billion, Chambers said.

"Their guidance is not too bad given the current environment we're in," said Mark Sue, analyst with C.E Unterberg , Towbin. He owns no Cisco shares and the firm does no investment banking for the company. "You have to give them credit for their execution. Considering the historic nature of data-networking, it's kind of unheard of to reengineer products, using less components."

Cisco ended the quarter with $21.2 billion in cash and cash equivalents - a sum significantly higher than any of its peers.

"They seem to be managing their expenses really well," said Raj Dave, credit analyst with Commerce Bank Capital Markets. He owns no Cisco shares and the firm has no investment banking relationship with the company. "They're continuing to squeeze suppliers and drive as much of the costs out of the business as they can. The outlook is quite another matter. They're guiding down in the third quarter, and they're saying that it's not going to be better (on margins), which tells me they've almost exhausted the costs side."

-Johnathan Burns; Dow Jones Newswires; 201-938-2020; [e-mail]


(END) Dow Jones Newswires

02-04-03 1959ET