Cisco's second-quarter results fall short of market expectations

Excluding one-time factors such as acquisition expenses and research and development costs, Cisco earned $1.33 billion, or 18 cents a share.

Analysts surveyed by First Call/Thomson Financial were expecting 19 cents per share. The company last failed to meet expectations in July 1994, and had beaten forecasts by exactly one penny per share for 13 straight quarters. Cisco had second-quarter sales of $6.75 billion, up 55 percent from $4.36 billion.

"This quarter was even more challenging than we originally anticipated in light of the abrupt slowdown in the U.S. and the dramatic slowing of capital spending," Cisco chief executive John Chambers said.

Cisco's bottom line has benefited for years from the explosive growth of the Internet and strong demand for the components that make up networks.

During recent meetings with analysts, however, Chambers had warned that its second quarter was "more challenging" than originally forecast.

At the root of Cisco's problem was the slowdown in the U.S. economy and the subsequent slowdown in capital spending, particularly by smaller U.S. telecommunications companies such as Internet service providers.

Such businesses showed a 40 percent decrease in spending from the first to second quarter.

"This capital spending trend could get worse before it starts to improve," Chambers said.

Cisco is expecting the economic slowdown to persist for at least two quarters, he said.

For the third quarter, revenue growth is expected to be flat to down 5 percent, compared to the second quarter. The fourth quarter is expected to be flat, compared to the previous quarter.

But sales growth for the entire fiscal year is expected to stay within goals -- a 40 percent gain over fiscal 2000, said chief financial officer Larry Carter. The company also will slow hiring and trim other operational costs.

"It would not surprise me to see the market turn up just as rapidly as we saw the market turn down," Chambers said.

Analysts had reduced their forecasts for Cisco after Chambers' warnings in December, but many said the company's outlook remains strong in the long term.

"It's important to note that 48 percent of their business comes from international sources, so it's shielded somewhat from the domestic spending slowdown," said Seth Spalding, an analyst for Epoch Partners.

Added David Willis, an analyst with the Meta Group in Stamford, Conn.: "This is a good company with a very good market share."

For the first six months of Cisco's fiscal year, net profits totaled $2.69 billion, up from $1.71 billion in fiscal 2000. Sales were $13.27 billion, up from $8.27 billion.

Despite missing expectations, Chambers was optimistic about the company's future prospects.

"We remain confident about the market opportunity ahead of us over the next three to five years," he said. "This confidence is based on the continued impact of the Internet on productivity, and just how much more work needs to be done before every company is an e-company and a majority of the world's countries are e-countries."

Cisco, widely seen as a barometer for the technology industry and the Internet economy, finished regular trading at $35.94, up $1.38, on the Nasdaq Stock Market. In after-hours trading, Cisco fell to $33.56.<