Cisco Misscos!

Market reacts to Cisco's bad news: Growth is slowing faster than Cisco execs expected UPDATED 2/7 11am EST

February 7, 2001

3 Min Read
Cisco Misscos!

Cisco Systems Inc. (Nasdaq: CSCO) has missed Wall Street's earnings estimates by one penny, ending its 13-quarter streak of beating estimates by that same amount.

This morning investors focused on the fact that the longer-term picture has never been more fuzzy for Cisco, after executives lowered their estimates for earnings and revenue growth for the next few quarters, in addition to saying that gross margins are likely to decline. In trading this morning, Cisco shares were trading down 4.08 (11.41%) at 31.67.

CEO John Chambers blamed Cisco’s earnings disappointment and its cautious revenue forecast on a slowing U.S. economy and reduced capital spending by both service providers and manufacturing firms.

Cisco, issuing its second-quarter fiscal 2001 results after the markets closed, reported net sales of $6.75 billion. Its pro forma net income was $1.33 billion or $0.18 per share (see Cisco Reports 2Q Results).

Although many analysts had recently lowered their expectations for the company, Wall Street's consensus expectation was for Cisco to report earnings of 19 cents a share, or about $1.4 billion. Cisco's year-ago earnings were $935 million, or 12 cents a share. As sales go, Wall Street was looking for $7.2 billion. Cisco fell well short of that mark, as well.

This morning, sell-side analysts issued a slew of "no duh" downgrades following the conference call. Morgan Stanley Dean Witter, Robertson Stephens, ABN AMRO, Lehman Brothers, and Credit Suisse First Boston all downgraded the stock.

Cisco CFO Larry Carter said that if the U.S. economic slowdown only lasts a couple of quarters and doesn’t spread internationally then Cisco’s Q3 revenues will be flat to down 5 percent, meaning the number will be somewhere between $6.4 billion and $6.72 billion. “Fourth-quarter revenue is likely to be flat with third-quarter levels,” he added.

Carter also reiterated that gross margins for the company’s products are likely to decline over time. He said Cisco expects gross margins to be about 60 percent, lower than the 61.8 percent and 63.5 percent gross margins seen in the previous two quarters.

Most telling of all, though, was the fact that Cisco reduced its own revenue growth estimates. In just three months, Cisco has changed its revenue growth projection for fiscal 2001 from between 50 percent and 60 percent annual growth to somewhere in the 40 percent range. Such a drastic change in expectations doesn't bode well for optical businesses and investors.

“The broadness, depth, and suddenness of the market weakness was unexpected and appears to have surprised Cisco and even high-end pure plays such as Sycamore Networks Inc. [Nasdaq: SCMR],” noted Epoch Partners analyst Seth Spalding, in a recent report.

Though Cisco has downplayed service provider spending slowdowns recently, CEO John Chambers took a different tack during a conference call on Tuesday (see Chambers: Cisco's Ready to Brawl). He noted, for instance, that carrier capital spending had gone from seeing double-digit growth in the four quarters preceding the final three months of 2000, to falling five percent during the final calendar quarter. He also said he realized that “capital spending could get worse before it starts to improve.”

Improvement areas for Cisco included “slowing headcount growth” and focusing “more on profit contribution, not just revenue growth,” Chambers said.

-- Phil Harvey, senior editor, Light Reading

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