Optical/IP Networks

Sources: Cisco's Sales Light

Cisco Systems Inc. (Nasdaq: CSCO) is almost two thirds of the way through its quarter, and the general consensus is that the outlook is deteriorating.

One Silicon Valley source, asking to remain unnamed, says they've "squeezed all the blood from the stone" during the last quarter and will have a hard time making things look good.

Meanwhile, Wall Street analysts are dropping down their expectations for the quarter, which ends April 30th and will be reported in early May.

This morning UBS Warburg lowered revenue estimates for both the April and July quarters. Nikos Theodosopoulos, the analyst who wrote the research note, says he expects the April quarter to be down 3 percent sequentially versus a previous estimate of down 2 percent.

Theodosopoulos says he changed his estimates based on checks with the company’s channel partners, as well as its component suppliers that have indicated weaker than expected sales in February and March (see Cisco Reseller Throws Cold Water). He is also predicting that sales in the seasonally strong July quarter will be flat versus a previous estimate of up 2 percent.

Cisco is known for managing its financials. But as the slowdown persists, it looks as though Cisco is finally feeling the pain.

“I think the enterprise market has gotten very challenging,” says Erik Suppiger, an analyst with Pacific Growth Equities Inc. “And I think that we are finally seeing the deterioration and prolonged stagnation of the market having some effect on Cisco.”

The biggest source of concern for analysts is Cisco’s book-to-bill ratio, which in April is expected to be below 1.0 for the third straight quarter. The book-to-bill ratio refers to the ratio of orders taken to products shipped and bills sent. In other words, a book-to-bill of 1.0 implies incoming business equals outgoing product. If the ratio is less than 1.0, it indicates that the company isn’t carrying over any orders into the next quarter.

Perusal of the markets suggests that sales in the United States, Germany, China, and France remain challenging for Cisco and are likely to be down sequentially, according to Theodosopoulos. These sales in aggregate represent about 50 percent of the company’s revenues.

While the April quarter is seasonally weak for Cisco, the July quarter has traditionally been strong. But given the current business environment, expectations for the July quarter remain low. Some analysts are also nervous about the impact of the war in Iraq on the July earnings. Suppiger says that a continuation of the war could further depress enterprise spending, which would ultimately hurt Cisco. He predicts that some enterprise customers may delay large projects if the war continues.

But war isn’t the only thing worrying some Cisco investors. As large companies like Dell Computer Corp. (Nasdaq: DELL) and the joint venture between 3Com Corp. (Nasdaq: COMS) and Huawei Technologies Co. Ltd. start to go after Cisco’s switch and router business, the company needs to show it can fend of these threats (see 3Com Taps Huawei in Enterprise Battle).

In the near term, UBS Warburg and other analyst firms say they are just waiting to see what happens. UBS Warburg maintains a Neutral 2 rating on the stock and the 12-month price target of $14.50.

A Cisco spokeswoman says it's Cisco's policy not to comment on future results.

— Marguerite Reardon, Senior Editor, Light Reading

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single mode figure 12/5/2012 | 12:21:16 AM
re: Sources: Cisco's Sales Light THE Horror! Brando and Chambers are both up the river and totally out of touch. Remember the days when they payed 7 billion for Cerent, guys like Ajib had to hire Armor Cars to take those Cisco dollars to the bank. What a contrast, all those deals, I'll make this prediction, Cisco falls and great will be it's fall, what's left of the silicon valley will look much as it did in the 1980's. Brave new world, THE HORROR!!
green 12/5/2012 | 12:21:12 AM
re: Sources: Cisco's Sales Light SMF,

I hope your prediction comes true. There is very little love for Cisco in the valley (excluding cisco employees ofcourse).

but I think they will manage to do another dose of fiddling with their numbers and manage to beat the street by one cent.. The 2 billion dollar write-off they took a while ago should help them out.

I don't think 3com-huawei is a threat to cisco yet. 3com burnt its bridges by exiting out of the enterprise market once before and huawei has legal troubles.

My bet is on Dell to kick some cisco butt. Switches account for 40% of cisco revenue. They are easy enough to build so Dell shouldn't have problem manufacting them. Dell already sells to the enterprise customer so the sales channels/relationships are already in place. Cisco won't stand a chance against Dell's pricing. The outrageous prices that Cisco charges for their switches has to come down.

At the end Cisco will end up like IBM. not best-of-breed in technology but will do just fine with their service revenue.
rjmcmahon 12/5/2012 | 12:21:11 AM
re: Sources: Cisco's Sales Light At the end Cisco will end up like IBM. not best-of-breed in technology but will do just fine with their service revenue.

What service revenue?

CSCO's fate may be more like that of SUNW. SUNW created a more valuable open access platform, in my opinion, but never could reach the masses. A pure IO company with no last mile infrastructure may have an even more challenging future.

PS. Agreed that DELL can shoot down the margins of these SV companies. Servers for $399 (and possibly much less) along with their new ink business makes one wonder when Heloise is going to enter the convent.

Everyone has made a big deal of Capellas being Abelard, since in the story Abelard ends up getting castrated. But no one has mentioned what happens to Heloise at the end of that story.

Anders: She ends up in a convent. She doesn't do so well either.

single mode figure 12/5/2012 | 12:21:10 AM
re: Sources: Cisco's Sales Light GREEN;
What is most suprising is that John Chambers was lauded for the acquisition strategy, like Josef Straus of JDS, SDL, most of which is worth nothing. Their core business was fine, then they challenged telecom with Cerent, Pirelli, and many more.

I just don't get the thorough waste of shareholder capital. Will the valley fall further, yes, unless aliens from another planet come and rescue it from itself.

rjmcmahon 12/5/2012 | 12:21:10 AM
re: Sources: Cisco's Sales Light Will the valley fall further, yes, unless aliens from another planet come and rescue it from itself.

Well, since any intelligent life from other planets would perceive the human species (per our behaviors) as little more than lepers, we'll have to reject that option.

How about this game plan:

o Vote SBC off the island.
o Tell INTC they will be voted off the island unless they start making real commitments to the society in which they belong.
o Suggest to to the local press to stop writing articles about foolish solutions such as Wi-Fi and start writing articles about what it really takes to rebuild our communications infrastructure.
o Admit that the houses are really only worth half the value, at best.
o Put in some mass transit between the towns. Luxury tax the hell out of any automobile propelled by an internal combustion engine which rolls on rubber wheels.
o Evict all VCs who haven't created a real company in the last ten years.
o Invite the friends of Frank to participate in the world's largest lottery. Tell them we wrote the program that generates the "random" number. Have them buy the winning ticket. Then have Grey Davis tax the payouts for eternity.

Seriously, the valley does seem to have lost its bearings. It's going to take some leadership beyond the motivations of greed to get it back on its feet. Since the country, and world, depend on this economy, let's all hope the SV recovery begins sooner than later.
BobbyMax 12/5/2012 | 12:21:09 AM
re: Sources: Cisco's Sales Light Cisco cares much about stock options and internal power structure than its long term viability. Its keeps moving its product focus. Most of Cisco' s products are not the best in the market.

"Dr. Chambers" makes appointment purely based on his whims. From a small company, called Crescendo Communications - a FDDI card manufacturer, he has appointed 5 persons to the rank of general Manager and President. How it is a small company of 25 people or so can produce a multitude of General Managers. This has a tremendous adverse impact on the business of Cisco and its product evolutions. It had a marketing person with no education in optical networking. Because of this Cisco's optical business never flourished.

Cisco has now drifted to storage business and plans to change the world. It has not published any hard data so that its claims can be verified.

So far Cisco has acquireed about 80 companies, but it has not hit the gold mines it was looking for. Its desire to enter the telecom world is also laughable.

Through its acquisitions of companies, Cisco fooled wall street analysts, and managed to raise its stock prices far beyond than its stock were worth. Now Cisco should ask the people who invested when the price $65 per share. It is very unlikely that ever go to that level again. This also suggests that the wall street analysts are redundant and can be trusted.

A chinese company by the name Huawei poses considerable threat to Cisco' router business because Huawei's products are much superior and priced very reasonably.

Cisco has filed a fictitous law suite against Huawei as one of its employees/contractors copied some very simple code from Cisco's router code. The strange thing is that Cisco itself was involved in appropriating technologies from Lucent Technologies.

Meantime Procket, a start-up, has started marketing much powerful routers than Cisco. So Cisco has no where to go.

BlueFox 12/5/2012 | 12:21:09 AM
re: Sources: Cisco's Sales Light Well, more than likely the reason why Cisco sales are light is because the economy is FUBAR, but...

Hopefully, customers have wised up and realized that it is not necessary to buy everything from one company. Buy what you need from a specialist, not from a reseller that just buys other companies without adding any value. Computers and networking equipment are now like hi-fi equipment. Network-o-philes will buy what works, and looks, the best.

This is a good trend since it will encourage innovation and startups, which will benefit all of us. Of course, this assumes the startup founders are acting with integrity, and not just role-playing in an attempt to be bought by Cisco.

The preceding is a Friday night, beer-induced, ramble by a long time Silicon Valley networking engineer who is tired of Cisco, and its business model. I would rather work for a small specialist who is good at what they do, versus a generalist who does everything.
Honda_Elise 12/5/2012 | 12:21:08 AM
re: Sources: Cisco's Sales Light "Meantime Procket, a start-up, has started marketing much powerful routers than Cisco. So Cisco has no where to go."

Procket? Come on!! The only thing keeping
them alive is the amount of money they raised.
I'll be surprised if they make any dent in
Cisco's business before they run out of money.
dogmeat 12/5/2012 | 12:21:05 AM
re: Sources: Cisco's Sales Light >Cisco cares much about stock options
>and internal power structure than its
>long term viability. Its keeps moving
>its product focus. Most of Cisco' s
>products are not the best in the market.

Cisco has one core business asset, the masses of drones in the Enterprises who reflexively order whatever Cisco is selling. This combined with totalitarian suppression of other vendor's equipment in their channel partners (I know a rep who was nearly fired for trying to position non-Cisco switches at SBC!) pretty much keeps the Enterprise market secure.

There are engineers coming back into the Enterprise market from Telecomms who are the only chance of leveling the playing field between Enterprise customers and Cisco. It will be a tough battle against big odds. If the tide turns in favor of customer, then Cisco will hurt that much more.

single mode figure 12/5/2012 | 12:21:05 AM
re: Sources: Cisco's Sales Light The valley is a serious thread and hard to follow in all it's segments. Given that the euphoria created by the flips, a lot of engineers got seriously wealthy, which got more people around the world frothing. Talented prospectors and goldminers from MIT, Stanford, Caltech, these are serious people. I don't think they are gone forever, just sidelined. VC's will be back. I see that Wilson, Sonsini, Goodrich and Rosati's parking lot looks empty and had a huge layoff.

Innocence lost, it might never be as fun again.
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