Cisco's Healthy Numbers--With An Asterisk

Coming back from a hellacious fiscal 2001, Cisco Systems has reported profit and revenue increases--for both the year and the fourth quarter--reminiscent of the dot-com bubble. Of course, the results come with the de rigueur asterisk.

Cisco CEO John Chambers, speaking during a conference call Tuesday, reported a 110-fold increase in profit and a 12% rise in revenue during the quarter. For the period ended July 27, Cisco's profit was $772 million, or 10 cents a share, on revenue of $4.8 billion. That compares with a profit of $7 million, or zero cents a share, on revenue of $4.3 billion a year ago.

For fiscal 2002, Cisco reported a profit of $1.9 billion, or 25 cents a share, on revenue of $18.9 billion, compared with a loss of $1 billion, or 14 cents a share, on revenue of $22.3 billion in fiscal 2001. The asterisk in this case is this: Cisco took a $3.7 billion charge against earnings in fiscal 2001 for excess inventory and a restructuring.

"This was another solid quarter for Cisco," Chambers said, in spite of flat or lower demand across nearly all product segments--its service market is especially depressed. With little or no improvement in demand, Cisco has concentrated on cutting costs and increasing profits, Chambers said.

"Cisco does a good job of engineering its products and maximizing profits," particularly by keeping manufacturing and other costs low to achieve higher-than-average margins, says Joel Conover, senior analyst for networking infrastructure at Current Analysis.

For example, Cisco's acquisitions of Hammerhead Networks and Navarro Networks earlier this year for a combined $260 million in stock will improve the performance and profitability of its routing and switching products--key areas for Cisco, Conover says. Navarro's high-powered ASICs for Ethernet switches, for instance, will help Cisco simplify its Ethernet switches, making them more powerful and easier to make, as well as more profitable, he says.

Separately, company execs say they will increase Cisco's planned stock buyback from the $3 billion announced last fall to $8 billion through Sept. 12, 2003. So far, Cisco has repurchased $2 million worth of shares.