Cisco Hits Targets, Says CEOs Still Cool on Spending

Network equipment maker Cisco Systems has reported a surge in profits that helped it squeak past analyst expectations, but the company actually booked lower sales and indicated that its customers may act even more conservatively heading into 2003.

Cisco’s net income for its second fiscal quarter totaled US$991 million, well above Q2 2002 levels of $660 million. In fact, this marked the San Jose, California-based company’s largest quarterly profit ever, though it stemmed more from cost-cutting measures than from top-line sales growth.

And the near-term outlook is not rosy. Cisco CEO John Chambers said in a conference call that sales, which slipped 2 percent in the second quarter to $4.7 billion from $4.8 billion in the first quarter, will likely fall another 2 to 3 percent in the third quarter.

“We are actually seeing even more conservative attitudes from many CEOs than we saw a quarter ago,” Chambers said, calling the current marketplace mood “probably the most challenging environment the information technology industry has ever faced.”

Wait-and-See Attitude

Chambers said most corporate decision-makers are still investing only in equipment and initiatives that will result in productivity gains. “We remain in a show-me economy,” he noted.

However, he added that a quick resolution to the Iraq conflict may help remove some uncertainty and create more “upside potential.”

Shares of Cisco stock were up slightly in early trading to $13.42.

Name Recognition

Gartner analyst Mark Fabbi told the E-Commerce Times that Cisco may not be able to maintain its recent trend of growing profits in the face of slipping sales. In the past, he noted, the company has been able to maintain strong profit margins in part because customers have been willing to pay a premium for its products.

“It’s a company with a strong balance sheet, one they know is going to be around to support what they buy,” Fabbi said. Cisco ended the most recent quarter with more than $2 billion in cash. “In a very unstable market, with vendors dropping off or being acquired all the time, that has gone a long way.”

But continued pressure on IT departments to trim costs may mean Cisco will be forced to lower its prices, Fabbi added, unless there is an upturn in tech spending.

Uncertain Year

Indeed, IDC research manager Paul Strauss said Cisco has been gaining share in markets it already dominates. But recent gains have come in smaller bites, mainly due to the struggles rivals have had with the economic environment.

“Last year was a buyers’ market. A lot of vendors cut costs to entice reluctant customers to upgrade,” Strauss told the E-Commerce Times. “We see some improvement in sales that should help all vendors in 2003, but if it doesn’t materialize soon, the price pressure will return with a vengeance.”

Router Route

In a breakdown of its product segments, Cisco said sales in its high-end router line were especially strong in the second quarter, rising 20 percent compared with the previous three months. Router sales made up 26 percent of total revenue, ranking second behind sales of switches, which made up 41 percent of Cisco’s sales. Services accounted for 17 percent of sales, and miscellaneous categories such as software accounted for 11 percent.

Several initiatives Cisco undertook in the quarter have yet to begin showing up in the bottom line, according to the company.

For example, Cisco rolled out a resale agreement with SBC Communiations that is designed to enable more companies to reduce costs by outsourcing more of their data needs. The company also was active on the acquisition front, buying Psionic Software and saying it would use that firm to integrate security features into its products, and saying it would seek to buy network security provider Okena.

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