Update: Cisco posts record profit in Q4

Cisco Systems Inc. on Tuesday reported record-high net income of $1.4 billion and earnings per share of $0.20 for the fourth quarter ended July 31, a significant leap from net income of $982 million and earnings per share of $0.14 in last year’s fourth quarter.

The profit met a consensus forecast of $0.20 per share from analysts polled by First Call/Thomson Financial. It came on net sales of $5.9 billion, up from $4.7 billion in the year-earlier quarter, according to a statement from Cisco, in San Jose, California. Analysts had forecast net sales of $5.88 billion.

Both the net income and earnings per share were Cisco’s biggest ever, according to U.S. Generally Accepted Accounting Principles (GAAP) and on a pro forma basis, President and Chief Executive Officer John Chambers said in the statement.

On a conference call with analysts, Cisco also announced two other milestones in its recovery from the telecommunications slump. Chambers’ salary of $350,000 per year was reinstated effective Aug. 1, after he asked Cisco in April 2001 to pay him $1 per year until the company recovered. He also has not received a bonus since June 2001. And in the fourth quarter, Cisco reported its first net increase in headcount excluding acquisitions in many years, Chambers said. The company plans to add 1,000 employees by the end of this calendar year, a majority of them in research and development, he said. At the end of the quarter it had 34,371 employees, a net increase of 64.

On the call, Cisco forecast revenue to remain flat or go up slightly in the first quarter of 2005 from 2004’s final quarter. Customers say they are more cautious than they were a month ago, Chambers said.

“Most of the CEOs that I’ve talked with view the economy as growing at a modest level,” Chambers said.

Cisco characterized its results as generally strong across countries and product categories, with the strongest growth in the U.S. and the Asia-Pacific region. In the U.S., Cisco’s biggest market with 48 percent of its revenue, enterprise and commercial sales grew strongly for the second quarter in a row and sales of service provider equipment had their strongest growth in more than three years, Chambers said.

Cisco got 30 percent of its sales from Europe, the Middle East and Africa, 11 percent from the Asia-Pacific region, 7 percent from Japan and 4 percent from the Americas excluding the U.S. Russia was a highlight, with sales growth of 40 percent year-over-year, and sales in China and India showed strong growth as well, he said.

Switch sales brought 41 percent of Cisco’s revenue in the quarter, with routers accounting for 24 percent, services 16 percent and other revenue 3 percent. Cisco’s advanced technologies, which are generally new product categories it has entered over the past few years, accounted for 16 percent of revenue. They include IP (Internet Protocol) telephony, home networking, optical, security, storage and wireless.

It was an action-packed quarter for Cisco, from the introduction of the Carrier Routing System-1 (CRS-1), the company’s first totally new IP core platform since 1997, to the apparent theft of code from Cisco’s proprietary IOS (Internetwork Operating System) software. The company also agreed to acquire assets of former rival Procket Networks Inc. and appointed long-time Cisco executive Charlie Giancarlo as chief technology officer.

In his new role, Giancarlo plans to look for new market and technology opportunities, bring together technology initiatives within Cisco to allow for more integrated networks, and foster interaction between Cisco’s technology teams and its customers, he said in an interview Tuesday.

Giancarlo said new technology in the CRS-1, especially as a new version of software called IOS XR, will trickle down to other products slowly. The CRS-1 is a router for the core of large service-provider networks.

“Because the IOS XR was designed for that very unique and demanding environment, it may be some time before some of those capabilities will get into other products,” Giancarlo said. The software will stay focused on the service provider segment for some time, he said.

On the conference call, Chambers listed growing competition from Asian networking vendors as one of Cisco’s areas of concern for the future.

“If you look out five years from now, and definitely in 10 years, the majority of our competitors will be (from) Asia,” Chambers said.

For Cisco’s full 2003 fiscal year, net sales were $22 billion, up from $18.9 billion the previous year. Net income for the year was $4.4 billion, or $0.62 per share, up from $3.6 billion and $0.50 per share for fiscal 2003.

In after-hours trading Tuesday, Cisco’s stock on the Nasdaq (CSCO) had fallen about 5 percent to $19.43, after climbing about 2 percent to $20.46 during regular trading.