Cisco: Tough Quarter in Progress
Cisco Systems Inc. (Nasdaq: CSCO) is being challenged on several fronts and is having a difficult time meeting its earnings and revenue forecasts for the current quarter, the first fiscal quarter of 2002, which ends in late October, sources tell Light Reading.
Sources close to Cisco's sales organization are saying that Cisco could report revenues as low as $3.9 billion for its first quarter. "We're being told [by Cisco salespeople] to expect a year-to-year decline of between 30 to 40 percent [for the quarter]" says one source at a New York hedge fund.
Last year during this quarter, Cisco reported about $6.5 billion in revenue. The aforementioned year-to-year decline would put the revenue range between $3.9 billion to $4.5 billion. Cisco had previously said it expects its first fiscal quarter of 2002 to yield revenues of between $4.09 billion and $4.3 billion.
Of course, Cisco officials were anything but bullish in their last conference call--and the stock has since languished in the mid-teens. So it's anybody's guess as to what the market expects.
"We would like to think that the bottom has been reached in our industry, but we don't think that we are there yet," said Cisco CEO John Chambers, during Cisco's most recent quarterly conference call in early August (see Cisco: No Bottom Yet).
The company recently reorganized its management and business units. The changes, Chambers said, were coming "at a time when we are beginning to see signs that our business is stabilizing (see Reorg Rips Through Cisco's Ranks)."
Wall Street analysts expect Cisco to report earnings of 2 cents a share and $4.19 billion in revenues for its first quarter of fiscal 2002, according to Multex.com.
Those making a case that Cisco will miss its quarter cite several factors, among them the recent terrorist attacks, slowing capital spending by service providers, and the ailing economy.
The September 11 terrorist attacks caused firms to stop shipping for a few days and delayed sales closures. After so many networking equipment firms lost about a week's worth of sales, many expect Cisco to follow Layer 3 networking vendors such as Riverstone Networks Inc. (Nasdaq: RSTN) in trimming expectations (see Riverstone Makes its Numbers).
"The October quarter is going to be tough because Cisco has had more of a direct exposure to business disruption than a lot of companies," says Stephen Koffler, an analyst at First Union Securities, Inc. in New York. "At this point, it's pure conjecture as to exactly how much they'll be affected."
Another worry: Cisco's mature products are too mature and its high-growth segments haven't taken hold yet. "All of the major product areas they play in are either too dead or too price competitive," says one source. High-growth areas like voice-over-IP and storage routing are too early and too small to make a difference in this quarter's numbers. "They'll both be big hits at some point, but it's too early now."
Officials from the Federal Reserve Board recently said that the economy was getting weaker even before the terrorist attacks. This, too, hints that investors should expect weaker sales of routers and telecom equipment. Manufacturing output was flat in July, and fell 5.5. percent year-over-year in August, the agency said. "The production of communications equipment and semiconductors remained especially weak," the Fed said in its monthly release on Industrial Production and Capacity Utilization.
Some in Cisco's sales force are grousing to analysts that they can't make their quotas if management doesn't take down its quarterly estimates soon, says a hedge fund manager. "They want management to confront reality and cut the numbers so they can get modified quotas and actually make some money."
Another hedge-fund manager in Chicago offered, "I think they'll bleed down estimates slowly, maybe report things are below plan [in early October] because of the World Trade Center event in the near term, and then hope they can pull off a stellar last month. The world's a tougher place to sell anything that's not directly related to survival than it was before, and Cisco gear doesn't qualify."
"We don't comment on our business during the quarter and we never comment on hearsay," a Cisco spokesperson said when asked to comment for this article.
- Phil Harvey, Senior Editor, Light Reading