Cisco's 4Q Profits Rise Despite Lower Sales - InformationWeek

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07:17 PM

Cisco's 4Q Profits Rise Despite Lower Sales

Net income was up 27% even though sales fell to $4.70 billion from $4.83 billion in the year-ago quarter.

Cisco Systems reported a 27% year-over-year gain in quarterly profit, but the networking equipment maker's slack sales and cautious forecasts offered little evidence of a recovery in the market.

For the fourth quarter of 2003, which ended July 26, the company Wednesday posted net income of $982 million, or 14 cents per share, up from $772 million, or 11 cents per share, in the same quarter last year. Sales were down slightly at $4.70 billion, from $4.83 billion a year ago. Year over year, product revenue was down slightly to $3.86 billion from $4 billion, and services revenue climbed to $840 million from $831 million.

Sales in Cisco's core business of routers and switches were mostly sluggish as the switching market remained challenging. "It's a function of the economy," says Charlie Giancarlo, senior VP and general manager of switching, voice, and carrier systems. Big-business buyers, such as those in investment banks, just aren't buying at the same volume, he says. "It's been the upper-end buyers who are more affected, the buyers who are most aggressive."

But Cisco showed strong growth in its advanced technology markets. While order volume in these sectors remains moderate, it's showing positive momentum, particularly in the company's IP telephony business. During the quarter, Cisco shipped its 2 millionth IP telephone; it took the company three years to ship the first million but just one year to ship the second million. Cisco says it has shipped more IP telephones than all its competitors combined.

IP telephony has been an area of "tremendous growth," Giancarlo says. "Customers have to periodically upgrade and or install new telephone systems. They're asking themselves, do they want to go with the last products of the old generation or the beginning of the next generation?" Even though many companies have put off those upgrade decisions, the telephony market is still such a large one that Cisco is benefiting from the few businesses that do make the decision to switch to voice over IP.

During the quarter, Cisco completed the acquisitions of SignalWorks Inc., a maker of software for IP telephony systems, which it bought for approximately $16 million, and the Linksys Group, a maker of networking products for homes and small businesses, purchased for approximately $480 million.

For the fiscal year, Cisco reported net income of $3.58 billion, or 50 cents per share, up from $1.89 billion, or 26 cents per share, in 2002. Sales were $18.88 billion, down slightly from $18.9 billion in 2002.

In a conference call, CEO John Chambers blamed the company's shrinking sales in large part on a continually weak economy and an expected recovery in the second half of the year that didn't materialize.

For the first quarter of 2004, Cisco expects revenue to increase slightly, around 2% to 4% sequentially over the fourth quarter. Chambers expressed doubt that the company could count on IT spending to perk up and reverse the company's retreating sales. "While things are starting to look better, it is still fragile and may not develop to a level we'd all like," he said.

Nonetheless, Chambers offered a cautiously optimistic forecast on the state of the economy. "For the first time in a very long time, I believe the external factors are beginning to turn positive," he said. "The recovery may be gaining momentum."

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