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Optical/IP

Analysts See Steady Cisco

Is Cisco Systems Inc. (Nasdaq: CSCO) ready for its quarterly closeup?

Summer earnings season is a nervy time, as the telecom sector's third-calendar quarter is seasonally slow. As usual, sector heavyweight Cisco is charged with being the industry's star, providing as much good news as possible when it reports its fiscal fourth-quarter and full-year results tomorrow.

So far, Cisco's rivals haven't upstaged it. Extreme Networks Inc. (Nasdaq: EXTR) predicted that it will show little revenue growth in the September quarter. Foundry Networks Inc. (Nasdaq: FDRY) missed analysts' revenue estimates for the June quarter. And Ciena Corp. (Nasdaq: CIEN) warned that revenues had evaporated instead of showing an expected double-digit growth (see Extreme Profits, Market Shrugs, Foundry Revenues Flatten in Q2, and Ciena's Ugly Day).

Analysts are expecting Cisco to report revenues of $5.89 billion, up from $4.7 billion in the fourth quarter of 2003, and earnings of 20 cents a share, up from 15 cents a share a year ago, according to First Call.

Many analysts expect the company to report sales as high as $5.9 billion and earnings as high as 21 cents a share. That’s because, while the numbers from Cisco’s competitors weren’t good, the underlying news wasn’t bad.

Cisco’s competitors didn't complain about lack of demand, says William Becklean, an analyst with Oppenheimer & Co. The problem was more of a logjam, as demand exceeded their ability to ship.

Since Cisco tends to manage outflow better, it won’t likely have a problem with delayed deliveries. Most analysts expect the company’s book-to-bill (the ratio of orders coming in to orders being shipped out) to exceed one, and it may be as high as 1.5, which is the base line for healthy business.

Merrill Lynch & Co. Inc. analyst Tal Liani reported in a research note that Cisco's aggressive pricing has taken market share from its competitors, and the company will likely show faster growth in the quarter.

Chris Sessing, an analyst with Crowell Weedon & Co., says Foundry has been hurt by a slowdown in federal spending, but Cisco isn’t as dependent on government contracts. That could work in Cisco's favor, given the current scandal over Cisco's contract with the City of San Jose, where it has designed a network that would include some 18,000 Cisco parts.

Many analysts are bullish on Cisco’s advanced technology sector in particular, which covers security, VOIP, wireless LAN, storage, and optical. Liani said that these products could account for as much as 40 percent of Cisco’s revenue growth for the quarter.

Even the optical sector, which has been sluggish, is waking up. Sam Greenholtz, principal at Telecom Pragmatics Inc., says DWDM sales improved dramatically for Cisco. “They have been able to do some things that have been a surprise even to them,” Greenholtz says. “I think they are pleasantly surprised that they are getting business that should have gone to Nortel.”

The tricky part, for Cisco, will be setting expectations for its growth. Liani expects Cisco will predict a 2 percent increase in sales for its October quarter -- and that's important because as goes Cisco's core business, so goes the rest of the sector. But given the presidential election and the Iraq occupation, both of which will slow corporate spending, Liani doesn’t think the company will be able to give much, if any, guidance for next year.

Given last week's market plummet on poor jobs numbers and high oil prices, investors are desperate for good news. But the current expectations on Cisco are so high, that it is unlikely that its good news will lift its stock.

What's more likely is that Cisco shares will tank on any hint of bad news -- so, much is hanging on CEO John Chambers' remarks about industry growth. “They will get killed if they don’t meet the consensus estimate,” says Jim Kelleher, an investment analyst with Argus Research. “This is a very unforgiving market now.”

Since Cisco shares hit a two-and-a-half-year high of $29.36 on January 16, the stock has dropped about 32 percent. That compares to a 17 percent drop for the Nasdaq composite index, even with last week’s market drop.

Cisco shares were up $0.13 (0.65%) to $20.06 in late afternoon trading on Monday.

— Marcy Burstiner, special to Light Reading

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jim_smith 12/5/2012 | 1:23:04 AM
re: Analysts See Steady Cisco According to the article, Cisco's rivals are:

Foundry - OK...
Extreme - Hmm...
Ciena - What?!

Ciena is Cisco's rival? Since when?

Comeon guys, Ciena is in a class of its own!

Yes, being the lowest of a lowly underclass is still being in a class of your own.
materialgirl 12/5/2012 | 1:23:03 AM
re: Analysts See Steady Cisco I suppose JNPR does not count here since CSCO is nowhere in the service provider space with their CSR!
Balet 12/5/2012 | 1:23:03 AM
re: Analysts See Steady Cisco I agree.
I believe that the author is a bit underinformed.
In telecom/datacom worlds almost everyone is Cisco's rival. All depends on which area we are talking about.
jim_smith 12/5/2012 | 1:23:02 AM
re: Analysts See Steady Cisco It's only a matter of time before JNPR starts feeling the heat from the CSR - literally.

But seriously, I think JNPR is loosing its advantage. Sooner or later Cisco is going to catch up.

Also, sooner or later Huawei is going to catch up with Cisco.

But, Huawei's nemesis is yet to be born.

Welcome to the jungle.
materialgirl 12/5/2012 | 1:23:01 AM
re: Analysts See Steady Cisco If Huawei had gear just like CSCO, then COMS would not have to basically redesign it to sell into "developed" geographies.
o-man 12/5/2012 | 1:23:01 AM
re: Analysts See Steady Cisco Isn't HuaWei the same as Cisco? The schematics look identical... Digital camers do wounders at the trade shows!
junm 12/5/2012 | 1:23:00 AM
re: Analysts See Steady Cisco Cisco is descending quickly in China market, not as someone mentioned before.

Especially in telecom market.. Cisco recently lost two major accounts to Huawei, Guangdong Telecom and Shanghai Telecom, each of the contract is several millions deal.. Now the carrier market share I think is 60% vs 40%(cisco).

On the enterprise side, Cisco is still good
but marketshare is dropping too. Cisco dont have any weapon to fight with Huawei and other domestic vendors. They are far cheaper, they are catching up in technology.. How can cisco dealing with them? After 3 years cisco will hold less than 40% of marketshare in my opnion.

Cisco internal guy also discloses that cisco china revenue decreased from 1B (2001) to 400+ million (2003).

Sooner or later, the story will be happened around world not only in china...
gotman 12/5/2012 | 1:22:59 AM
re: Analysts See Steady Cisco junm

I don't think cisco is the only one suffering here. Its anything from optical to wireless to routing which is being hit as local vendors build cheaper technology.
PO 12/5/2012 | 1:22:58 AM
re: Analysts See Steady Cisco After 3 years cisco will hold less than 40% of marketshare in my opnion.

Market share is certainly an important measure. But I would contend that it's a distraction: the story is Cisco growing sales slowly (even negatively) in a regional market which is growing more rapidly. That puts the writing on the wall for declining actual sales not too many years out.
Mark Showalter 12/5/2012 | 1:22:55 AM
re: Analysts See Steady Cisco '... the story is Cisco growing sales slowly in a regional market which is growing more rapidly.'

It seems to me that news of Huwaei getting business in China should not surprise anyone more than the news of US AirForce giving business to Boeing or AirFrance buying Airbus.

I have heard second hand that to do business in China, even for companies like Dell and Microsoft, a degree of 'technology transfer' is 'to be expected'. It seems to me that 'market growth' in China has many facets. And that choosing not to sacrifice longterm intellectual property for short term sales growth is tough, but probably the right thing to do.

While CSCO may not be best at everything, they appear to have top notch products in every segment of the telecom equipment market that is growing. Great distribution channels, brand, leveraging networking to lower costs by tightening the manufacturing chain ...

Sure they have their problems ... I don't have to personally operate a network that relies on their gear, software or support.
Ultimately CSCO's failings provide a source of hope for many startups.

Yet, if I want to invest in a US company that is well diversified across the global telecom equipment market - who else to consider?

JNPR? Service providers? ugh. Diversified? eh ...
COMS? I'm surprised these guys are still around
LU? Uh, not for me.

Who am I missing?

Mark




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