Cisco dampens growth prospects despite record Q4

The holidays might be a little less bright this year if Cisco's financial outlook is any indication.

The company's "record-breaking" fourth quarter was tempered by a caution going forward as customers rein in spending on network equipment because of a weak economy and election year uncertainty.

Cisco recorded the highest net income and earnings per share in its history for the fourth quarter that ended July 31, but the company gave a downcast preview for the first quarter of fiscal 2005, citing lessened optimism and decreased spending among customers, mainly because of macroeconomic factors such as the gross domestic product (GDP).

"Whenever the GDP increases or decreases, there's a corresponding [response] in capital spending," says Cisco CEO John Chambers.

Chambers says Cisco bases its own guidance on that of its customers. If they are a little more cautious in their optimism on their business prospects, he says, so is Cisco.

Cisco expects revenue to be flat to up only 2% for the first quarter of fiscal 2005, which began Aug. 1. That falls short of estimates from some analysts, such as UBS Warburg, which forecasted Cisco's revenue to increase 3% in the first quarter.

"Management suggested that corporations have become a bit more cautious from a quarter ago, suggesting a more moderate growth outlook than when Cisco entered the quarter," Nikos Theodosopoulos, an analyst at UBS Warburg, wrote in a bulletin. "Our own checks with networking industry salespeople also suggest a slowing outlook going into the second half of the year than a few months ago."

The recent indicators of a slowdown might counter analyst research released in the first half of this year that generally showed an IT spending increase of 5% or more by companies in 2004 over 2003.

"You just see a lot of projects postponed" because of the economy, says Zeus Kerravala, an enterprise analyst for Detwiler, Mitchell, Fenton & Graves. "People are trying to get a better handle on what inventory they have and how to make the stuff that they have work better vs. buying new stuff."

Kerravala says users are waiting until after the election to re-examine network investments.

"The uncertainty of what people are seeing in the economy right now, and an election coming up, has just made people a lot more cautious," he says. "It's safer to make no decision than a wrong decision."

Cisco didn't make many wrong decisions in the fourth quarter. The company recorded net sales of $5.9 billion, compared with $4.7 billion for the fourth quarter of fiscal 2003, an increase of 26%. Revenue was up 5.4% from the third quarter of fiscal 2004.

Net income, excluding certain charges, was $1.5 billion, or 21 cents per share, a penny better than the 20 cents per share that analysts expected. This compares with net income of $1.1 billion, or $0.15 per share, for the fourth quarter of fiscal 2003, and net earnings of $1.4 billion, or $0.19 per share, for the third quarter of fiscal 2004.

For the year, Cisco posted net sales of $22.0 billion, compared with $18.9 billion for fiscal 2003, an increase of 16.8%. Pro forma net income was $5.3 billion, or $0.76 per share, compared with $4.3 billion, or $0.59 per share, for fiscal 2003.