Cisco earnings disappoint by a penny

Historically, Cisco Systems Inc. has beaten Wall Street earnings expectations by a penny a share. But in its conference call with analysts after the market closed yesterday, the San Jose-based networking giant reported that second-quarter earnings would come in at 18 cents per share, one cent off analysts' predictions.

Cisco shares were down by more than $5, or 14% in mid-day trading today.

In explaining the share price drop, Michael Speyer, an analyst with the Yankee Group in Boston, said that although Cisco is subject to economic slowdowns just like other companies, even a slight deviation from expectation is "more than the market can stand."

Net sales for the quarter were up by 55% at $6.75 billion, compared with the $4.36 billion reported for the same period last year. And pro forma net income was $1.33 billion for the quarter, up 48% from the same period last year.

However, it wasn't the second-quarter report that worried analysts and investors. They're concerned about the future growth of Cisco, a point addressed directly by Cisco president and CEO John Chambers in the conference call.

"We started to see some initial softness [in product sales] the second week in December, which continued throughout much of January," Chambers said. Sequential growth of 4% from the first quarter to the second quarter was somewhat troubling, too, he added.

"The challenge [in growth] was primarily in the U.S. alternative service provider market," he said. Alternative service providers include companies such as emerging competitive local exchange carriers that compete with the regional Bells.

Another economic factor affecting Cisco was the slowdown in capital spending by U.S. manufacturing companies, Chambers said. Those companies account for about 20% of Cisco's enterprise network equipment sales.

That doesn't surprise Speyer. "The enterprise is no longer the growth engine that it used to be," he said.

Still, the CEO was relatively optimistic. Based on his observations at the recent World Economic Forum in Davos, Switzerland, and from a visit to Asia-Pacific countries, including China and India, the economies in those regions seem solid, he said, which will create more opportunity for network-equipment sales in these areas.

Chambers maintained that his company would continue to grow 30% to 50% per year over the next five years, but added "the next several quarters will be challenging."

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