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Cisco profits rise, but revenues slip

Echoing news from its competitors, Cisco Systems Tuesday posted a higher quarterly profit from a year ago, but said revenues were lower as the technology spending slowdown continues. — By John W. Schoen
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Like the rest of the technology sector, Cisco Systems Inc. Tuesday posted slightly better-than-expected fourth quarter profits but said its customers are still thinking long and hard about spending money on new projects. With the U.S. stock market and economy stuck in neutral, Wall Street has been looking for any hint of a pickup in the tech spending that helped fuel the late 90s boom. But it looks like the long wait for signs of an upturn in tech spending will continue into 2003.

CISCO, THE WORLD’S largest maker of equipment that directs Internet traffic, said it closed out 2002 year with higher quarterly profits compared to a year ago. But the San Jose, Calif.-based firm reported lower sales amid the technology spending slowdown.

Net income for Cisco’s fiscal second quarter of $991 million, or 14 cents a share, compared with $660 million, or 9 cents a share, in the year-ago quarter. That’s a penny better than analysts were expecting, according to Thomson Financial/First Call. Excluding one-time items, it earned 15 cents a share, compared with 9 cents last year.

Revenue in the second quarter slipped to $4.7 billion from $4.8 billion a year earlier — in line with expectations.

Cisco CEO John Chambers told a conference call of investors, analysts and reporters said that the current market is “probably the most challenging environment the information technology industry has ever faced.”

Chambers predicted revenues for the current quarter will be flat to down slightly. And he said the weak economy makes the outlook tech spending just too cloudy to forecast beyond that point.

“CEOs will wait to spend until they see their own revenues and profits pick up,” said Chambers. Those CEOs “have become even more conservative than just a quarter ago.”

Analysts say any forecast that calls for a rebound in technology spending has to include a major asterisk concerning possible war with Iraq.

Customers “are saying, ‘We might as well wait a little longer,’ ” said Legg Mason analyst Timm P. Bechter. “I do think there is some pent-up demand out there. At some point, that ends up coming through.”

But Iraq isn’t the only cloud over corporate spending on more hardware and software. Bechter notes that a number of regulatory issues surrounding the cable and telephone industries are holding up spending by those industries. And until companies see clear evidence of a general economic rebound, they’ll continue to keep their spending and investment tight, according to Timothy M. Slevin, an analyst at Parker/Hunter in Pittsburgh.

“There’s been a general clampdown in spending across the board,” he said. “If what is in place is good enough, if there’s not a definable positive return, it will be hard to get projects approved.”


From chip maker Intel to services giant IBM, the story has been the same: Profits in the latest quarter held up surprisingly well, providing some hope that technology companies have seen the worst of across-the-board corporate spending cuts. But the forecasts provided by these companies have been cloudy at best.

IBM has said it expects to meet profit estimates for the rest of the year — but only if there is a “modest” recovery in technology spending. Microsoft has warned that revenues for the current quarter and its full fiscal year would come in below analysts’ estimates in a persistent slump in information-technology spending. (MSNBC is a Microsoft-NBC joint venture.)

And Sun Microsystems eked out a small operating profit, thanks to stronger pricing and lower parts costs, but posted its largest net loss ever, taking more than $2 billion in acquisition-related charges. And the company said the outlook was so murky it wouldn’t even venture a forecast for the rest of the year.

With their customers hunkered down, tech companies are pinching pennies, too. Cisco continues to squeeze more profits out of every dollar of revenue. The company’s gross margins rose to 70.4 percent in the latest quarter — up a full point from the prior quarter. The company continues to trim its payrolls; Cisco ended the latest quarter with 34,987 employees, down from 36,786 a year ago.

Cisco highlighted several notable bright spots in the otherwise gloomy outlook for tech spending. As companies continue to churn out millions of megabytes of new data — more documents, images, and stored transactions — storage hardware makers like EMC and McData have reported solid growth. Cisco recently signed deals with IBM and Hewlett Packard to sell its storage area network products.

Tech providers like Cisco also see strong demand for products that help their cost-conscious customers save money. Hardware and software used for so-called “voice over IP telephony” — moving telephone traffic to the Internet — has helped companies cut their phone bills by placing calls over the Web. Sales of wireless networking equipment are also strong as small businesses and individuals set up small computer networks without having to rewire their homes or offices.

Cisco echoed other tech hardware and software makers’ comments that the push for increased security has helped fuel demand for products designed to protect corporate networks. The need for tighter security will likely require continued spending, as technology continues to provide new ways to defend — and attack — information networks.

“You can build a 12-foot wall, but there’s always someone out there selling a 13-foot ladder,” said Bechter.

Cisco continues to generate roughly $300 to $400 million a month in cash, churning out another $1.4 billion in cash for the quarter. Some investors have suggested Cisco pay some of that cash to shareholders in the form of a dividend — especially if the Bush administration succeeds in removing the personal income tax on dividends.

But Chambers said the tax overhaul was far from certain, and shareholders voted down a dividend proposal by a wide margin last year. He said the company continues its aggressive stock buyback program, buying another $1.5 billion worth of its stock during the latest quarter.