Cisco Report Cheers Analysts, Investors

Several analysts on Wednesday boosted their estimates of the network-equipment maker's earnings and revenue for the first quarter ending Oct. 31 and the year ending in July 2001. The company's shares popped 3.5% and pulled up the tech sector while other stocks languished.

Late Tuesday, Cisco said it earned 16 cents a share for the fourth quarter, a penny ahead of the analysts' consensus estimate and up from 10 cents a share a year earlier. Revenue jumped 61% to $5.72 billion from $3.56 billion last year, well ahead of most analysts' estimates of about $5.4 billion.

The results impressed analysts, who noted that the San Jose, Calif., company posted huge increases in most segments, including a 100% year-over-year revenue growth in its service-provider business and 45% growth in the enterprise division.

"The breadth of Cisco's strength is across the board," said Alex Henderson, an analyst at Salomon Smith Barney.

Henderson raised his estimate of Cisco's first-quarter earnings to 17 cents a share from 15 cents a share. He also boosted his forecast of fiscal 2001 earnings to 74 cents a share from 66 cents a share. Henderson increased his revenue estimate for fiscal 2001 to $28.36 billion from $26.7 billion. That represents an annual growth rate of 50.4%, compared with his previous estimate of 44%.

Cisco's fourth-quarter results and outlook aren't without concerns. Cisco management said Tuesday it expects its gross profit margins to decline in coming quarters. Specifically, the company expects margins to drop 50 to 100 basis points over the next two quarters.

Henderson, the Salomon Smith Barney analyst, said he expects Cisco's gross margins to fall to 62% by the end of fiscal 2001 from 64% in the fourth quarter ended July 29. He attributed the drop to Cisco's entry into relatively new segments of the networking market, including optical products. Sales in these businesses have lower margins because they require significant personnel resources but still generate relatively small sales levels, at least compared with Cisco's overall revenue base.

Cisco executives said Tuesday that gross margins were also hurt by component shortages. Cisco was forced to boost its inventory and spend more than anticipated to expedite component deliveries.

Another concern was a slowdown in sales of Cisco's GSR router, which is used to help steer data traffic across networks. Fourth-quarter GSR sales rose 10% from the third quarter, a much lower rate than the 57% sequential growth in the third quarter. Henderson attributed the slowdown to a Cisco competitor, Juniper Networks (JNPR), which recently introduced a competing product and appears to be taking market share from Cisco.

But overall, Henderson and other analysts were bullish on Cisco's prospects. Jim Wade, a Deutsche Banc Alex. Brown analyst, noted that Cisco management estimated large companies would double their spending on information technology over the next few years to 7.5% of their sales. Much of that spending will be on network equipment, and Cisco stands to gain from that trend, Wade said.

Andy Schopick, analyst with Nutmeg Securities, sees several other trends working in Cisco's favor. Cisco executives said Tuesday the company's effective tax provision would fall to 28% in fiscal 2001 from 30% in 2000. What's more, the company's nonoperating income from investments and lease financing appears to be accelerating, Schopick said.