updated 11/10/2005 9:41:08 AM ET 2005-11-10T14:41:08

Cisco Systems Inc.’s fiscal first-quarter profit slipped as it expensed employee stock options for the first time, but the bigger surprise came when the world’s largest network equipment maker predicted weaker-than-expected sales.

The San Jose-based company said it expects revenue for the second quarter of fiscal 2006 to grow 8 percent to 9 percent over last year’s $6.1 billion. If it hits the top of the range, it would still fall short of the $6.73 billion expected by Wall Street.

The company also said it still expects revenue to increase by as much as 12 percent for all of fiscal 2006 — and up to 15 percent annually over several years. Investors aren’t so sure Cisco can meet these goals, said Jean Liu, an analyst at Victory Capital Management.

“When companies become that big, growth slows,” she said. “Cisco maintains they’re a growth company, and that’s what people are struggling with.”

Executives said the company experienced growth in most areas of the world and across its product lines, from its core business of routers and switches that direct data traffic over the Internet to its advanced technologies such as storage, wireless and security products.

For the three months ended Oct. 29, Cisco earned $1.26 billion, or 20 cents per share, compared with $1.4 billion, or 21 cents per share, in the first quarter of fiscal 2005. Sales jumped 10 percent, to $6.55 billion from $5.97 billion.

Its profit was dragged down by a $228 million expense for stock options — just as Cisco and other high-tech companies predicted would happen when the Financial Accounting Standards Board proposed and adopted the rule.

If the stock-option expensing rule had been in effect last year, the company said it would have posted earnings of $1.12 billion, or 17 cents per share, in that period.

“You will note, whether we include or exclude stock option expense, our comparative to net income trends are positive,” said Dennis Powell, Cisco’s chief financial officer.

Excluding one-time items, Cisco earned $1.6 billion, or 25 cents per share, compared with $1.5 billion, or 21 cents per share for the first quarter of fiscal 2005.

Analysts were expecting Cisco to earn 24 cents per share on sales of $6.58 billion, according to a survey by Thomson Financial.

During the conference call, Cisco CEO John Chambers pointed to the company’s revenue growth in the first quarter, which was tempered by weakness in its European business.

“If Europe had been where we would expect it to be, it would have been one heck of a quarter,” he said. Its business in the United States, Asia and emerging markets delivered strong results, he added.

Chambers also credited demand by customers who are not only buying traditional routers and switches but coupling them with its advanced technology offerings.

“Cisco’s long-term product architecture strategy is taking hold,” he said.

Cisco has been working on a half dozen, so-called advanced technologies that enhance its routers and switches. It’s betting the technologies can each generate revenue of $1 billion or more each year, said Charles Giancarlo, Cisco’s chief development officer.

Revenue from the advanced offerings in total grew approximately 25 percent year over year, compared with 13 percent for routers and 3 percent for switches.

Cisco also plans to announce additional advanced technologies before the end of calendar 2005.

“The best time to capture a market transition, whether it’s for technology or our business model or a new market, is well before the transition is apparent to the mainstream of the market,” Giancarlo said.

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