Rolling in Cash, Cisco Puts Up a Good Quarter

Updated from 4:33 p.m. EST

Even if it wasn't the most momentous earnings report ever, it was a Cisco (CSCO) classic.

The networking giant Monday afternoon posted better-than-expected first-quarter earnings, showing an unexpected sequential revenue gain. The company also guided second-quarter guidance slightly higher, though its reasoning was typically oracular. Investors were impressed, as they are wont to be these days, sending the stock up 84 cents after hours on Island to $18.75.

Though the numbers showed few blemishes, considering the current expect-nothing-and-be-happy investing mindset, a breakdown of Cisco's profits is instructive. Half of Cisco's earnings came from its hefty bank balance, which rose during the first quarter to a staggering $19.1 billion. That's clearly good, in that Cisco's in absolutely no danger of financial pressure -- but also bad, in that it shows just how weak the operating environment is.

And through revenue adjustments, Cisco actually painted a slightly sunnier picture than reality, says Sanford Bernstein analyst Paul Sagawa. "I think the adjustments dress it up a little bit, and I don't expect most investors to read past that," says Sagawa, who rates Cisco market perform. "They'll say wow, Cisco is growing again, and in reality they are not growing yet."

Upside

For the first quarter ended last month, the company earned 4 cents a share on revenue of $4.45 billion. Analysts expected Cisco to make 2 cents a share, down from 18 cents last year, on revenue of $4.19 billion, down from $6.5 billion a year earlier. For the fourth quarter ended in July, Cisco earned 2 cents a share on revenue of $4.3 billion.

Cisco declined to offer detailed financial guidance for coming periods, saying it would see slight sequential improvement in the second quarter, including a single-digit revenue gain, but failing to shed any more light on the matter. Analysts expect second-quarter earnings of 3 cents a share on revenue of $4.22 billion, down from earnings of 18 cents on revenue of $6.7 billion a year earlier.

But even without a word on its financial outlook for the second half of fiscal 2002, investors were taking a positive spin out of CEO John Chambers' remarks. Chambers said gross margin would climb in the second quarter to 55% from 54%, reversing a long decline in that number amid the industrywide spending chill.

Waxing, Waning

Chambers also projected second-quarter revenue growth even while conceding that three key areas -- U.S. sales, sales to phone companies and sales to businesses -- showed weakening trends in the first quarter. In fact, in a bit of irony considering the CEO's hard-core entrepreneurial rhetoric, one of Cisco's primary strengths in the first quarter came from its dealings with the federal government.

Of course, unbridled bullishness was the hallmark of Cisco before the fall. Even early this year, when investors were catching on to the cash crunch spreading across the industry and Cisco competitors were starting to soft-pedal their wild-eyed targets, Chambers maintained that Cisco could continue growing at the absurd rate of 50% a year. Only after several earnings disappointments and a wave of firings did the Cisco juggernaut, by now some 75% off its peak, tone down the triumphalist rhetoric.

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