Optical/IP Networks

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 http://www.lightreading.com
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stout4555 12/4/2012 | 8:56:30 PM
re: Cisco Misscos! Anyone know what the growth associated with Cisco's Service Provider and Carrier segment was??
green 12/4/2012 | 8:56:30 PM
re: Cisco Misscos! This earnings miss is to be expected. look at JNPR to gauge the health of the networking industry. csco is too big to expect it to grow at phenonmenol rate for ever. it is also well know that csco is struggling in the optical networking market and high end routing market (two high growth businesses)
lu_csco_nt 12/4/2012 | 8:56:29 PM
re: Cisco Misscos! 1 penny....
Skiier_Dude 12/4/2012 | 8:56:24 PM
re: Cisco Misscos! So today's news on Cisco's first miss in a long time has to be a bit of a disappointment to many who were hoping for the usual 1 penny earnings boost huh?

Had not been back to see these posts in quite some time, and many of your comments are right on the mark. Don't get me wrong, Cisco is a formidable player in the telecom hardware marketplace. I am a shareholder, and really want their stock to head back on it's northward journey again. Yet, I do believe that Cisco no longer holds the unique position it once held in the marketplace which allowed it to see past growth numbers as stellar as they were. Cisco will grow. Their revenue numbers will increase and their stock will rise once again -- it's just going to take longer. Cisco is one of the buy-and-hold stocks in my portfolio.

I do believe that there is now several competitors in the market who make products as good as or better than Cisco's -- and that customers are beginning to be comfortable in purchasing these solutions. There is a common saying in the industry which is something like "Nobody ever lost their job buying Cisco" -- I just don't believe that applies any longer.

There are technologies where Cisco has invested heavily -- and is not doing as well as they had hoped -- Voice, Wireless, Optics to name a few. These technologies do diversify their product portfolio (which is good), but also place a significant drag on the bottom line. The result -- they can no longer charge the premium that their brand used to command, combined with a higher operating costs results in shrinking margins and lower net earnings (see my earlier post http://www.lightreading.com/bo... and read today's results http://www.lightreading.com/do.... They are simply no longer the IP specialist they used to be -- and their venture into new technologies has had a bit of a net drag on their brand in general.

So, today's announcement is not a big shock -- sort of surprized at how quickly it came -- but I think it's good to get the miss out of the way now while the market is used to bad news. Down the road, look for Cisco to begin trimming out some of the below the line costs -- likely will result in some trimming of staff acquired in purchases who are redundant, rationalization of some product lines, and some non-core programs being dropped.

It will come back -- but I believe will now behave more like a regular "blue chip" than the rocketship it used to be. Appreciate your comments.

Swoosh ;-)
hippo 12/4/2012 | 8:56:22 PM
re: Cisco Misscos! enjoy this nice article from CBSNews and decide if you want to listen to these anal-ysts again...


"It was analysts proclaiming what the stock would do, not analyzing what the businesses said they would do." - Former Internet analyst Lise Buyer.
dc boy 12/4/2012 | 8:56:13 PM
re: Cisco Misscos! Skiier_Dude - Dude, I think you've nailed it square on the head. That seems to be the m.o. of the technology giants.....IBM in the 70's, Microsoft in the 80's, and Cisco in the 90's.
light_saber 12/4/2012 | 8:56:00 PM
re: Cisco Misscos! "Cisco's $6.75 billion in revenue was 55 percent higher than the same quarter a year ago, net income for the quarter of $1.33 billion trumped last year's figure by 48 percent and its 18-cent earnings figure was a 50 percent increase over its 2000 first quarter. But despite that growth, many analysts and investors feel Cisco should have done better."

One word - unfreakingbelievable! 48% percent growth in income, if only we all could be so "challenged".
joeysmith 12/4/2012 | 8:55:58 PM
re: Cisco Misscos! # of vc's working 24x7 to build the networks of tomorrow: 97

VC's who allow their portfolio companies to get trashed by Lightspeed-backed LightReading: 17

VC's who owe it to their portfolio companies to challenge this arrangement: 17

Likely shame of a VC who backs Lightreading when you look across at me at the upcoming Robbie Stephens dinner: incalculable

The truth: Priceless

What do people think? Let's oncover the truth!!!

joeysmith 12/4/2012 | 8:55:56 PM
re: Cisco Misscos! Hard-working, earnest people whose start-up companies get trashed beause they a) don't buy advertising from LightReading or b) aren't a Lightspeed portfolio company: 2,371

...inclduing Lucent, Ciso and Nortel employees: 507,322

Readers who read LR misrepresentations about their companies and have the guts to rise up, reveal the truth and protect their companies and fellow employees: 3

Companies that subsidize LR's attacks on other companies through advertising dollars: 17

Challenging Steve Saunders and Lightspeed-backed LR in the name of accurate reporting: priceless

The truth will set you free. Can anyone else come forward with the truth please?

Thank you!
joeysmith 12/4/2012 | 8:55:54 PM
re: Cisco Misscos! Optical and access companies advertising on LR: 17

# of these companies getting bad press on LR: 1

Probably monthly cost of a banner ad on a website: $35,000

Ethical value of "hush money": $0

The truth: priceless

My partners and I ask all fair-minded people in this inudstry to rise up and uncover the truth. Make yourself and your companies proud! If you sponsor LR, do the right thing!!!

Thank you!
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