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Tuesday August 7 9:06 PM ET

Cisco Net Profit Tumbles 99 Percent

By Ben Klayman

CHICAGO (Reuters) - Technology bellwether Cisco Systems Inc. (Nasdaq:CSCO - news), the top maker of the gear that powers the Internet, on Tuesday reported a fiscal fourth-quarter net profit of just $7 million, sinking 99 percent from a year earlier as it posted sales on the low side of expectations.

Reeling from a global economic slowdown and turmoil among its corporate and telecommunications customers, Cisco, whose shares slipped after the results, posted the first annual loss in its 11 years a public company. In a sign that the worst may not be over, it cautioned its first-quarter sales may drop by as much as 5 percent from the fourth quarter's $4.3 billion.

Fiscal fourth-quarter net income, including charges to cover the effect of acquisitions, employee stock options and restructuring costs, fell to $7 million, or nil cents a share, compared with a net profit of $796 million, or 11 cents a share, in the year-earlier quarter ended in July.

``No one really knows when the economy and capital spending will bottom out,'' Chief Executive John Chambers told analysts on a conference call following the financial results' release.

``We understand that calendar year 1999 and 2000 were a unique time of rapid spending, but we don't believe the fundamentals of our industry have changed,'' he added.

While the U.S. market is approaching a bottom customers remain cautious, Chambers said. Business also is not looking any better in Europe or Asia, and could still get worse in Japan.

However, one analyst believes Cisco is simply waiting to say it has hit bottom until after it has started back up.

``You can start to make a case that while uncertainty is there, business is picking up,'' J.P. Morgan H&Q's Greg Geiling said. ``They're not going to call a bottom too early.''

Others analysts felt Cisco did not provide what investors had hoped for, saying when the economy would start to improve. Instead, they got words of caution from Chambers.

``Cisco's total business is at least one or possibly two quarters away from a trough,'' said Justin McNichols, portfolio manager with Osborne Partners Capital Management.

In reaction to the report, shares of Cisco fell to $18.80 in after-hours trading on Instinet from a close of $19.26. In regular Nasdaq trading on Tuesday before the results were released, the shares fell 28 cents, or about 1.4 percent.

The San Jose, California-based networking giant said its operating earnings for the quarter ended July 28 were $163 million, or 2 cents a share, compared with $1.2 billion, or 16 cents a share, in the year-earlier quarter.

Analysts had expected the company to post operating earnings of 2 cents a share, excluding charges, with a range of nil to 4 cents, according to market research firm Thomson Financial/First Call.

Cisco posted an actual net loss for the fiscal 2001 year, including items, of $1.01 billion, or 14 cents per share, compared with net income of $2.67 billion, or 36 cents per share, for fiscal 2000.

Fourth-quarter sales fell 25 percent to $4.3 billion from $5.72 billion last year. Cisco had said sales would be flat to down 10 percent from $4.73 billion in the third quarter. Sales for the full fiscal year rose 18 percent to $22.29 billion.

``It looks like they did a very good job of cost controls,'' Dresdner Kleinwort Wasserstein analyst Ariane Mahler said of the company's quarterly operating profit. She said the 2-cent profit was all interest income.

``Cisco results are like a money market account,'' she added, contrasting how the company had to rely on its store of $18.5 billion in cash to generate profits instead of relying on sales of its network gear.

Chambers said cash is key during slowdowns and the company would use the money for a number of things, including potential stock buybacks and acquisitions of smaller firms. He said Cisco was not interested in Britain's Marconi Plc. (MONI.L)

He also said Cisco will not aggressively cut prices to win market share at the expense of profits.

Over the past year, Cisco's shares have underperformed the Standard & Poor's 500 index by about 65 percent, while outperforming its bedraggled peer group in the American Stock Exchange Networking index by about 9 percent.

Chambers said Cisco was on track to cut $1 billion in operating costs on an annualized basis. He said the company had gained market share in the latest quarter against key rival Juniper Networks Inc. (Nasdaq:JNPR - news), as well as Nortel Networks Corp. (NYSE:NT - news)(NT.TO) and Lucent Technologies Inc. (NYSE:LU - news)

Cisco officials said the company had pared back a huge glut of unsold inventory to $1.7 billion from the $2.2 billion level reported during the quarter ended in May.

Like many communications equipment and technology firms, Cisco has grappled with the sputtering global economy and a customer spending slump in telecommunications equipment.

Last month, fiber-optic powerhouse JDS Uniphase Corp. (JDU.TO)(Nasdaq:JDSU - news) posted a $50.6 billion loss for the year, the largest in recent North American corporate history. Meanwhile Nortel reported a second-quarter $19.4 billion loss, following a third quarter loss of $1.89 billion by Lucent.

However, Chambers said in May there was a gleam of light at the end of a long, dark tunnel as there were signs the networking and communications sectors could hit bottom in the next one or two quarters and perhaps resume growth in 2002.

But the company cautioned the outlook remained murky, especially among service providers which include telephone companies and cable televisions firms.

Cisco long delivered strong quarterly revenue growth of 30 percent to 50 percent, even posting eye-popping rates of 60 percent or better in 2000.

On Tuesday, Chambers slightly hedged on his prediction the company can return to the days of 30 percent to 50 percent annual growth, saying it was an achievable ``stretch'' goal. Analysts have said 15 percent to 20 percent is more realistic.

-- (M@rket.trends), August 08, 2001