Net economy turning south?

The holidays may 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 due to a weak economy and election-year uncertainty. Cisco recorded the highest net income and earnings per share in its history for the fourth quarter 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, due mainly to macroeconomic factors like the gross domestic product (GDP).

CEO John 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.

For example, Cisco expects that the U.S. federal government will not raise spending as much as anticipated in the first quarter due to more balanced spending throughout the year, Chambers says. Also, the first quarter is usually the weaker quarter for Cisco.

As a result, Cisco is expecting revenue to be flat to up only 2% for the first quarter, which falls short of some analysts’ estimates. UBS Warburg, for example, expected revenue to increase 3% in the first quarter.

“You just see a lot of projects postponed” due to 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, how to make the stuff that they have work better vs. buying new stuff.”

Kerravala believes users are waiting until after the election season to re-examine their network investments.

“There’s just a lot of caution,” he says. “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. 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 % sequentially.

Pro forma net income was $1.5 billion, or 21 cents per share, a penny better than the 20 cents per share analysts were expecting. This compares to net income of $1.1 billion, or 15 cents per share, for the fourth quarter of fiscal 2003, and net earnings of $1.4 billion, or 19 cents per share, for the third quarter of fiscal 2004.