Cisco's profit slides

August 7, 2001: 6:27 p.m. ET

Network gear maker logs earnings decline, lowers the bar for 1Q

NEW YORK (CNNfn) - Cisco Systems Inc. Tuesday reported earnings that tumbled 86 percent in the latest quarter, and executives told analysts to be "more conservative" when setting their setting their financial expectations for the company in the coming months.

"When in doubt about our goals, we would encourage you to take the conservative view," John Chambers, Cisco's chief executive, said during a teleconference Tuesday evening.

He also warned of continued weakness in the United States and the potential for a further downturn in Japan and the Asia-Pacific region, and said Cisco's revenue in the current quarter could fall as much as 5 percent, where analysts generally had been expecting a modest uptick in sales.

Shares of Cisco (CSCO: down $0.28 to $19.26, Research, Estimates), which makes more than two-thirds of the routers and switches that link computer networks and power the Internet, fell 28 cents to $19.26 on Nasdaq ahead of the news. They fell another 37 cents to $18.89 in extended-hours trade.

After the close of trading Tuesday, Cisco reported that it earned $163 million, or 2 cents per share, in its fiscal fourth-quarter ended July 28, excluding one-time charges. That's down 86 percent from a profit of $1.2 billion, or 16 cents per share, a year earlier.

Including one-time items, Cisco's net income for the fourth quarter was $7 million or break-even on a per-share basis, compared with net income of $796 million or 11 cents a share a year ago.

At $4.3 billion, sales fell 25 percent from $5.7 billion; both the sales and profit numbers matched analysts' estimates, according to First Call, which tracks Wall Street forecasts.

Cisco's fourth-quarter revenue slid about 9 percent from the third quarter's $4.7 billion. After the company reported its third-quarter results, Cisco executives said they expected fourth-quarter revenue to be flat-to-down 10 percent from the third quarter.

The company recorded a $187 million charge for excess inventory in the fourth quarter after taking a massive $2.2 billion charge the prior quarter.

Cisco, one of the most highly valued and closely watched companies on Wall Street, had been booming along with the Internet. But since the U.S. economy stalled and the dot.com balloon popped, the once mighty company has been cutting back its financial targets, writing off excess inventory and cutting costs, including job cuts, with other tech companies struggling to stay profitable.

During the teleconference, Chambers said Cisco has taken more than $1 billion out of its cost structure on an annualized basis as a result of the cost-cutting measures.

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At the same time, Chambers advised analysts to be more conservative in setting their expectations for the company in the coming months. In the current quarter, he said the company anticipates revenue to be "flat-to-down 5 percent" from the fourth quarter's $4.3 billion.

Analysts most recently had been expecting Cisco's revenue in the current quarter to rise modestly to $4.4 billion, according to the First Call survey.

He did not provide an earnings estimates nor a revenue estimate for the full fiscal year ending in July 2002. Chief Financial Officer Larry Carter said the company's first-quarter gross margin, the percentage of sales remaining after subtracting product costs, will be "low to mid-50 percent."

During the third-quarter's teleconference, Chambers had said he was seeing "a number of positive indications" that the downturn in capital spending could reach a bottom in the next one to two quarters.

On Tuesday, his comments were decidedly more cautious. He said business conditions in Japan and the Asia-Pacific region "may get worse before they get better." He also said the company's short-term visibility is "still limited to a several-month window, which could deteriorate rapidly."

At the same time, he said there are continued signs that Cisco's business in the United States is stabilizing.

Despite the slowdown in the company's end markets, Cisco executives in recent quarters have stood by their traditional forecast for long-term growth ranging from 30 percent-to-50 percent in countries with healthy economies.

During Tuesday's call, Chambers characterized that as "a stretch, but an achievable goal for Cisco." Still, he said the company's long-term outlook "has not dramatically changed."

For all of fiscal 2001, Cisco reported an operating profit of $3.1 billion, or 41 cents per share, on revenue of $22.3 billion. That compares with a profit of $3.9 billion, or 53 cents per share, on sales of $18.9 billion in fiscal 2000.

Including one-time items, Cisco's net loss for fiscal 2001 was $1 billion or 14 cents per share, compared with a net profit of $2.7 billion or 36 cents per share in fiscal 2000.