Cisco's Borg-like acquisition spree may be curtailed

Suffers profit and revenue shortfall

Cisco has missed its second quarter profit and revenue forecasts.

The networking giant also trimmed expectations for its next quarter and predicted sales then be down five per cent on its revenues this quarter, which would mark the first time its revenues have declined between quarters in its 11 years as a publicly traded company.

A slowdown in US economy and reorganisation amongst US service providers, a key market for Cisco's high-end routers, have hit its revenues far more than it first predicted.

Similar reasons forced rivals 3Com, Lucent Technologies and Foundry Networks to issue profit warnings in December, and Cisco's results show it isn't as insulated from a general networking market slowdown as was first supposed.

Excluding costs for acquisitions and other charges, Cisco's profit for the quarter was $1.33 billion on sales of $6.75 billion, far short of earlier estimates of $7.13 billion. Cisco's actual net income for the second quarter of fiscal 2001 was $874 million.

Cisco's chief financial officer told analysts in a conference call that the networking giant's revenue for its next quarter will be "flat to down 5 per cent". Sales in the fourth quarter are also expected to be pegged at around the same level.

Overall 2001 revenues for Cisco are now forecast to grow by about 40 percent instead of 55 per cent, equating to revenues of about $26.5 billion for Cisco's fiscal year which ends in July.

Cisco is known for consistently surpassing expectations and the disappointing figures have sent shock waves through the technology sector and caused its shares to fall from $35.75 to $33 in after hours trading.

It should be noted in all the gloom that Cisco's sales of $6.75 billion were up 55 per cent on the same quarter last year, and that it is, for all its detractors, a well run business with a strong product portfolio and enviable customer base.

However Cisco faces challenges on financial front that might affect it even more than prevailing market conditions.

Cisco's acquisitions are made mostly by pooling, using its shares to buy target companies (normally start-ups). The imminent ending of pooling of interests as accounting practice in the US could severely curtail Cisco's Borg-like tendencies to acquire firms with promising technologies. ®

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