Wall Street Journal "Cisco Adds to High-Tech Worries"

Cisco Adds to High-Tech Worries
Profit Matches Estimates,But Revenue Falls Short And Outlook Is Cautious
By SCOTT THURM Staff Reporter of THE WALL STREET JOURNALNovember 10, 2004; Page A3

Computer-networking titan Cisco Systems Inc. offered new causes for worry about the strength of the high-tech recovery, with middling fiscal first-quarter results and a tepid outlook for coming months.
Cisco of San Jose, Calif., reported first-quarter revenue slightly below analysts' expectations. Orders trailed shipments. A key profit measure declined. And Cisco failed to reduce inventories that had grown rapidly in recent quarters.
Chief Executive John Chambers declared it a "good" quarter for Cisco, but said the company continues to face challenges, ranging from the hesitancy of corporations to buy technology gear to a rising wave of low-cost Asian competitors.
For the three months ended Oct. 30, Cisco said net income increased 29% to $1.4 billion, or 21 cents a share, from $1.09 billion, or 15 cents a share, a year earlier.
Revenue rose 17% to $5.97 billion from $5.1 billion a year earlier. But revenue increased less than 1% from the preceding quarter. That was consistent with Cisco's forecast, but about $50 million shy of analysts' expectations.
Profit matched expectations because Cisco held down expenses better than it projected. But even that silver lining came with a cloud: some of the decrease was the result of lower-than-projected commissions to salespeople. Chief Financial Officer Dennis Powell said he expects operating expenses to rise slightly in the current quarter ending in January, compared with the just-completed quarter.
Cisco's results add to a growing body of evidence that the strong rebound in tech spending that began about a year ago has begun to weaken. Other tech giants, including Intel Corp. and Microsoft Corp., also have felt the impact of slowing growth in corporate purchases.
Reinforcing the concerns, Cisco projected that revenue in the current quarter would increase 12% to 14% from a year earlier, slightly less than analysts had expected. Mr. Chambers said he doesn't expect customers to increase spending at the end of the year to exhaust unused technology budgets. "I expect people will be a little more conservative," he said.
CATCH OF THE QUARTER

See how 12 big companies fared during the fall earnings season.
Tim Luke, an analyst for Lehman Brothers Holdings Inc., called Cisco's forecast "somewhat uninspiring," although he noted that Cisco projected orders would outpace shipments in the current quarter.
The company reported its results after regular trading hours. In 4 p.m. Nasdaq trading, Cisco shares fell 22 cents to $19.75. In after-hours trading, Cisco shares dropped to $19.27.
Despite concerns, Cisco continued to be a cash machine, generating $1.5 billion in cash from operations. Cisco reported holding roughly $17.7 billion in cash and liquid investments, down from $19.3 billion three months ago, because of its aggressive share-repurchase program.
Cisco's gross profit margin, or sales minus the cost of producing goods sold, slipped to 67.2% of revenue, compared with 68.4% in the prior quarter. Mr. Powell said the decline was the result of increased sales of low-cost Linksys home-networking products and the introduction of new switches that direct computer traffic across corporate networks. Mr. Powell said Cisco typically introduces new products at lower-than-normal profit margins and then modifies the products to reduce production costs -- and increase profits.
Mr. Powell said inventories didn't decline, as many analysts expected, because Cisco is keeping more spare parts to support new products in areas such as security and Internet telephony. Mr. Powell said the company had reduced, by $106 million, the parts it has ordered from suppliers to keep pace with its more subdued forecast.