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Cisco Falls Short of Expectations
With Second-Quarter Results

By Matthew Fordahl   Associated Press
SAN JOSE, Calif. — Cisco Systems Inc., the world's top supplier of equipment for the Internet and other computer networks, blamed the softening U.S. economy as it missed Wall Street's earnings expectations for the first time in more than six years.

Cisco, widely seen as a barometer for the technology industry and the Internet economy, earned $874 million, or 12 cents per share, in its second quarter ended Jan. 27. In the same three-month period a year ago, Cisco earned $816 million, or 11 cents per share.

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 switches and routers that make up computer networks.

At the root of Cisco's problem was a 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.

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.

Analysts had reduced their forecasts for Cisco after earlier warnings from Chambers 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.

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