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The Honolulu Advertiser
Posted on: Wednesday, May 9, 2001

Cisco earnings exceed expectations

USA Today

Cisco Systems reported earnings yesterday that barely beat lowered expectations, but it didn't give investors hope that the tech industry will recover soon.

Investors were relieved that Cisco didn't have more bad news. The networking giant earned 3 cents a share in its fiscal quarter that ended April 28, excluding a raft of special and restructuring charges but including interest income. That topped expectations of 2 cents a share.

As expected, revenue fell 30 percent from the previous quarter to $4.7 billion, largely because telecommunications companies continued to cut purchases of Cisco equipment.

But Cisco's inability to predict an end to the tech downturn caused investors to sour on the stock, driving it down 3 percent in after-hours trading to $19.74. Before Cisco posted its earnings, shares were up $1.12 in regular trading to $20.37 as investors hoped for positive guidance.

Cisco's outlook is crucial to the recovery of tech stocks. In fact, cautious optimism yesterday that network companies may be hitting bottom helped pull the Nasdaq composite index up 25.20 points to 2,198.77 even while blue chips fell. But such optimism may be a bit too early because:

• CEO John Chambers says the company can return to a 30 percent to 50 percent annual growth rate, but he wouldn't hazard a guess as to when. "We do not have a crystal ball," Chambers says.

• Cisco has never had to navigate out of such as dramatic downturn.

Including a $1.2 billion restructuring charge and other costs, the company lost 37 cents a share compared with a gain of 8 cents a share a year earlier. That was its first net loss. Cisco is laying off 18 percent of its workforce, or 8,500 people.

Cisco also wrote off $2.2 billion of excess inventory. While $300 million less than Cisco previously warned, it shows just how aggressive expansion plans were.

• Further layoffs by both tech and nontech companies take away the urgency for companies to upgrade computer networks, says Martin Pyykkonen, analyst with C.E. Unterberg Towbin.

"When companies are cutting back in size and have fewer people, you don't need that extra switch or router," he says.

Such uncertainty isn't what investors were hoping for. Cisco stuck by its forecast that growth in the current quarter will be flat to down 10 percent. But, "We're not confident we've seen the true bottom," says Mike Volpi, Cisco's chief strategy officer.