Updated from 5:04 p.m. EDT

Even the hype isn't the same these days at


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Cisco Gets Upgraded and Stock Surges

Financing Risk Looms Despite Cisco's Cautious Stance

For Cisco, Today's Write-Off May Be Tomorrow's Free Ride

Inventory Mess Shows Cisco Can't Turn on a Dime

Juniper Is Still Creeping Up on Cisco, Dell'Oro Report Says

Transamerica's Jeff Van Harte Talks Cisco

After third-quarter earnings exceeded sharply lowered expectations Tuesday afternoon, the company was distinctly lukewarm about its prospects during a nearly two-hour conference call with analysts. So lukewarm, in fact, that it added a qualifier -- "in countries with good economies" -- to its well-worn prediction of 30% to 50% annual revenue growth.

In the end, Cisco's earnings release and conference call were light on illuminating facts. Investors listening in weren't blindsided by bad news, but neither did they hear good things about a stock that even after the past month's rally remains 75% off of last year's high. The service provider business appears to be just as bad as analysts and investors feared, and a price war in the router business appears to be developing as rumored.

"I didn't get off that call feeling warm and fuzzy, like I need to go out right now and buy that stock," says a New York hedge fund manager who has no position in Cisco.

No Shirt, No Shoes

Cisco Tuesday afternoon reported third-quarter operating earnings of 3 cents a share on revenue of $4.73 billion, beating the

sharply reduced

Thomson Financial/First Call

analyst consensus of 2 cents on sales of $4.7 billion. Both figures plunged from a year ago, when Cisco earned 13 cents a diluted share on revenue of $4.93 billion. The stock slipped in after-hours trading as Cisco carped about the economy and detailed how an unfolding price war is sapping margins. As it

predicted last month, Cisco recorded restructuring costs and other special charges of $1.17 billion and an excess inventory charge of $2.2 billion in the latest period. The company had forecast a charge totaling up to $3.7 billion in those two areas but took a smaller inventory charge because it overestimated the amount of gear it needed to charge off. Including charges related to layoffs and inventory writedowns, Cisco lost $2.7 billion, or 37 cents a share.

Clearly, a spending pullback by cash-strapped customers and an economic slowdown have played a significant role in Cisco's newfound mirthlessness. Perhaps the factor weighing heaviest on the networking giant was the rotten news from the company's service provider business. CEO John Chambers said sales to small phone and Internet companies dropped 75% over the last year, as the customer list fell to 150 outfits from 3,000 customers Cisco once counted in its heyday.

Price War?

Gross margin fell to 54.5% for the third quarter from 61.8% in the second, CFO Larry Carter said on a conference call with analysts, due to a changing product mix, revenue deferral and discounting.

The sliding margins will feed speculation among some investors of a vicious price war between Cisco and


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in the core routing market, judging by recent Cisco contract wins. Routers are like speedy mail sorters that direct packets of Internet traffic to their addressed locations. Juniper had enjoyed a lead in high-capacity routers, having introduced a box that could handle up to 10 gigabits, or 10 billion bits of information per second. This gear was eagerly received by telcos that spent most of last year cobbling together high-capacity 10-gig optical pathways and wanted to open up bottlenecks at junction points.

Up until January, Cisco's highest-speed core router topped out at 2.5 billion bits per second. But Cisco has been gaining customers for its 10-gig Juniper-killer router in recent weeks. Last week, undersea fiber-optic network operator

Global Crossing


signed on for Cisco's new box. Some investors suspect that Cisco is cutting prices well below Juniper to win back market share.

Cisco CEO John Chambers has maintained that price isn't the main selling point. But he recently added that in a price war, the largest companies will prevail, signaling he'd be willing to outgun Juniper if necessary.

If price pressure continues, Cisco will see continued erosion of its gross margin. But Juniper will continue to lose its share of the market that had exceeded one-third at the end of last year, a far more damaging prospect for its shareholders.


Cisco reiterated its previous guidance for the fourth quarter, which calls for earnings to be flat with third-quarter levels on a pro forma basis and for revenue to decline as much as 10%. Cisco didn't offer any guidance about fiscal 2002 financial results.

But acknowledging the roller-coaster ride the company has taken over the last 18 months, CEO Chambers said in a statement: "The first four months of 2001 were extremely challenging as we went from year-over-year bookings in excess of 70% in November to 30% negative growth within a span of several months.

"This may be the fastest deceleration any company of our size has ever experienced," Chambers added, continuing to blame the economy for the company's souring results. "It is also now clear to us that the peaks in this new economy will be much higher and the valleys will be much lower, and the movement between these peaks and valleys will be much faster. We are now in a valley much deeper than any of us anticipated and we believe the basic issues are macro economic and capital-spending related."

After rising $1.13 during regular trading to $20.38, Cisco dropped 38 cents to $20 after hours on