Cisco's Sales Down But Profits UpCisco's Sales Down But Profits Up

Cost-cutting helped Cisco Systems' second-quarter income rise more than 50% over the same quarter last year, despite falling revenue. But CEO John Chambers projects revenue will be flat to slightly down next quarter.

Net income for the quarter ended Jan. 25 was $991 million, or 14 cents a share, compared with $660 million, or 9 cents a share, in last year's second quarter. At $4.7 billion, revenue was down 2.1% from $4.8 billion in the year-ago quarter.

Cisco continues to focus on three key areas: its core routing and switching market, the service-provider market, and new growth opportunities. Among Cisco's nine growth markets, customers last quarter expressed the most interest in IP telephony, security, wireless, storage, and optical. Cisco will devote 40% of its total resources to the new growth areas, even though they represent only about 15% of the vendor's total revenue. Chambers doesn't expect the results of such decisions to be reflected in earnings for another 12 to 24 months.

Though he admits that revenue growth is a problem area, Chambers says he's pleased that profits are at an all-time high. Moving forward, though, he doesn't expect business leaders to drastically increase spending. "Today's economy remains a show-me economy," Chambers said during a conference call after the earnings were announced. "CEOs will wait to spend until they see their own revenue and profits pick up."

Cisco has been hit hard by the meltdown in spending by large companies as well as telecommunications companies, which drove much of its growth in the late 1990s. To compensate, the company has dramatically cut costs and focused more attention on other business opportunities.

Cisco reported its earnings after the Nasdaq Stock Market closed Tuesday. The company's stock closed the day down 28 cents a share, to $13.20.