“The recent pickup in spending on networking equipment – the routers and switches that move information across the Internet and private networks – may be less impressive than it first appears,” writes Alex Berenson in today’s New York Times.

“In the last few months, Cisco Systems and other networking companies have reported big gains in their sales and profits, fueling a revival in technology stocks.”

“But government spending has accounted for a substantial share of the growth, not corporate investment, according to stock analysts and the companies themselves.”

“And the growth in government technology spending is leveling off. The president’s proposed budget for the 2005 fiscal year projects technology spending at $59.8 billion, a rise of 1 percent from 2004. So only an increase in corporate technology spending can generate the growth that investors in Cisco and other networking companies appear to be expecting.”

“In the last six months, Cisco’s sales to the federal government have grown more than twice as fast as its sales to private companies.”

“Since 2000, federal government spending on information technology equipment has risen from about $42 billion a year to nearly $60 billion, mainly because of new defense and homeland security programs. Spending on defense projects like the Global Information Grid, which is designed to provide soldiers with real-time information from satellites and other sources about potential threats, is expected to continue to balloon.”

“State and local governments spend tens of billions of dollars more on information technology annually. Because many federal programs are classified, knowing exactly where the money is going is impossible to determine.”

“But based on corporate filings with the Securities and Exchange Commission, two of the biggest beneficiaries appear to be Cisco, the largest maker of networking gear, and Foundry Networks, another maker of high-end switches and routers. Both companies have seen sharp increases in their sales to the government, and Foundry appears to have wider profit margins on its government sales than sales to private companies.”

” ‘If you look at the bright spot over the last two years it really has been the government business, because the government has had money to spend,’ a spokeswoman for Cisco, Kim Gibbons, said. ‘We have seen that business grow and continue to grow’

“From August to January, Cisco’s sales to the federal government increased 23 percent from the comparable period a year earlier, the company said in its most recent quarterly filing. Its overall product sales in the United States, including government sales, rose 11 percent in the period, to $4.2 billion. Cisco’s overall worldwide revenue, including products and services, rose 10 percent, to $10.5 billion.”

“Calculating how much government sales contributed to Cisco’s growth is all but impossible. Cisco does not break out its business with the federal government, state and local governments, or the governments of other countries.”

“Ms. Gibbons said that Cisco’s sales to the federal government represent 17 percent to 23 percent of its ‘enterprise bookings,’ which include sales to the government as well as to big companies like General Electric. But Cisco does not disclose the value of those bookings, she said.”

“Last year, on a conference call with investors, Cisco said that it had more than $1 billion in sales to the federal government in its 2003 fiscal year, which ended in July. The company did not provide a more specific sales figure, but its overall United States product sales were $7.4 billion last year. So government sales represented at least 13 percent of Cisco’s overall American product sales last year, and the percentage is climbing.”

“Still, Cisco would be growing solidly even without its government sales.”

“In the last year, its stock has risen 68 percent, and the company now has a market value of $162 billion, making it the third-largest technology company.”

“Foundry, a smaller competitor, appears to be largely dependent on federal business for its growth.”