Cisco's Q4 Not All Smiles

Cisco Systems Inc.'s (Nasdaq: CSCO) fourth-quarter earnings hit analysts' estimates on the nose, but its forecast for the coming quarter was flatter than some investors expected.

CEO John Chambers predicted revenues for the first quarter, which ends in October, would grow between zero and 2 percent from the July quarter's $5.9 billion (see Cisco Sales Hit $5.9B for Q4).

In addition to seasonal effects -- Cisco's fiscal first quarter is typically a letdown after the fourth quarter -- Chambers noted a dampening of enthusiasm among customers. CEOs he's spoken to "are a little more cautious in their optimism than they were a quarter ago," Chambers noted on a conference call with analysts today.

Growth of 2 percent would give Cisco first-quarter revenues of $6.04 billion, just short of analysts' expectations of $6.06 billion, according to Reuters. In after-hours trading, Cisco stock was down about 4 percent until the estimate came out -- then it slipped to $18.87, down $1.59, or about 8 percent.

Chambers went out of his way to point out that Cisco doses its outlook with "healthy paranoia," but the numbers still may not sit well with investors, especially given the spots of trouble that cropped up during July's batch of earnings (see Extreme Profits, Market Shrugs, Foundry Revenues Flatten in Q2, Ciena's Ugly Day, and Agere Stung by 3G (Again)).Adding more paranoia, Chambers noted that Cisco has worked to lower its lead times during the past year. That means the company is going to be more susceptible to seasonal effects in the future, he said.

Cisco's "advanced technologies" -- six businesses the company pinpointed as having billion-dollar potential -- continued to contribute solidly to results. Wireless revenues were up 15 percent from the third quarter and up 45 percent from the fourth quarter of 2003. And storage networking grew 41 percent sequentially and 180 percent year-over-year.

The modest forecast isn't enough for Cisco to call off its aggressive plans, which include 1,000 new hires by the end of calendar 2004. Those plans are vital for Cisco's long-term future, Chambers noted. "I would say it's very important we make our investments now for what's going to [come] one or three or four years out." That doesn't mean Cisco has been carefree with spending, though: "We actually brought down expenses at a much faster pace than we modeled."

For its fourth quarter ended July 31, Cisco reported net income of $1.4 billion, or 20 cents per share, on revenues of $5.9 billion, compared with net income of $1.2 billion, or 17 cents per share, on revenues of $5.6 billion in the previous quarter.

For the fourth quarter last year, Cisco reported net income of $982 million, or 14 cents per share, on revenues of $4.7 billion.As often happens, Cisco's pro forma earnings beat analysts' estimates by a penny, at $1.5 billion, or 21 cents per share.

Cisco's fiscal year went well enough that the company will reinstate John Chambers' salary at $350,000 per year, the level it reached in April 2001. At that time, Chambers had requested his salary be dropped to $1 per year with no bonuses (but with stock options) until the business righted itself. "Compared to that time, Cisco's quarterly revenue has increased approximately 25 percent," CFO Dennis Powell said.

Craig Matsumoto, Senior Editor, Light Reading