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Optical/IP

Waiting for Cisco

As Cisco Systems Inc. (Nasdaq: CSCO) prepares to report its fiscal fourth-quarter 2001 earnings after the closing bell on Tuesday, many investors are waiting in eager anticipation, hoping that Cisco might say something positive to lead the sector out of its Slough of Despond.

By and large, Cisco is expected to meet or beat Wall Street's expectations for the quarter ended July 29, 2001. The Street sees Cisco earning 2 cents a share on revenues of $4.3 billion. If it meets these expectations, revenues will be about 25 percent worse than its results for the comparable year-ago period. Cisco's guidance for the quarter is in a revenue range of $4.22 billion to $4.69 billion, or flat to down 10 percent from its fiscal third-quarter 2001 results.

The big item to watch: Cisco's internal growth estimates, or financial guidance, for the quarters ahead.

Salomon Smith Barney analyst Alex Henderson wrote in a recent report that he thinks Cisco will give positive guidance. "Certainly, Cisco is not going to go out on any limbs, but we think the solid book-to-bill [ratio] and improved activity will likely make it likely Cisco gives guidance of flat revenues to up modestly Q/Q [quarter to quarter]."

Positive financial guidance would be a refreshing change from the news of the last few quarters, in which Cisco took billions of dollars in write-offs, purging its balance sheet of a lot of acquisition-related goodwill and excess inventory. Last quarter alone, Cisco took a $1.17 billion restructuring charge against earnings and took an excess inventory charge of $2.2 billion.

Cisco's stock price, interestingly, has been in the $19 range, very close to the price it held after its last earnings report -- the worst in its history. The stock's 52-week low came on April 4, when its shares sank to $13.19.

That suggests that Cisco's stock is close to finding a bottom, barring any further bad news. "When you see [so many write-offs], you're going to see them say, 'Hey, our stock price is at its lowest -- let's test the waters,' " says Brian Kinard, a partner at Blueprint Ventures. "When they do test the waters, people will begin to see some light coming through the clouds."

Indeed, market stability and corporate earnings guidance are among the things that investment bankers are eyeing to see if the market may be returning from its lowest point (see M&A Activity Continues to Crawl). Notably, Cisco has bought two companies so far this year versus the 15 it had acquired by this time last year (see Cisco to Acquire Allegro and Cisco Buys 10-Gig Chip Maker).

Although Cisco continues to announce positive strides with service providers, such as an expanded relationship with Qwest Communications International Corp. (NYSE: Q) announced today (see Cisco Wins Qwest Deal), the company remains mostly an enterprise equipment vendor. Analysts at A.G. Edwards guessed that only about 20 percent of Cisco's last quarterly revenues came from its service provider line of business. Nortel Networks Corp. (NYSE/Toronto: NT) and Lucent Technologies Inc. (NYSE: LU), the two giants of the telecom equipment space, haven't given any financial guidance in several months.

That, of course, doesn't lessen the impact of what Cisco will say. "Just as Microsoft is able to tell us more than any other single source about the nature -- the strengths, weaknesses, growth trajectory -- of the global PC industry, so is Cisco able to do the same thing for the global networking industry," said Donald Luskin, CEO of MetaMarkets.com Inc., in remarks this morning.

Shares of Cisco closed down 0.51 (2.54%) to 19.54 in trading Monday.

- Phil Harvey, Senior Editor, Light Reading
http://www.lightreading.com
rafaelg 12/4/2012 | 7:59:31 PM
re: Waiting for Cisco Does anyone really think that Cisco would have anything different to say?

Nothing has changed for the last 3Q's. People are starting to sound like a tape recording...

cfaller 12/4/2012 | 7:59:30 PM
re: Waiting for Cisco rafaelg wrote:

"Does anyone really think that Cisco would have anything different to say?"

In a word, yes. Cisco's revenues come from corporates, i.e. end users. If enterprise customers are still buying routers, then they're also buying bandwidth to connect those routers. If they're buying bandwidth, then service providers will be buying more gear. Trickle down economics at its best.

While it's possible that Cisco may not give positive guidance, it's still important to listen. Nortel and Lucent refusing to give visibility into their Class 5 switch sales to the RBOCs and PTTs isn't helpful, but Cisco's visibility is.
The Carmack 12/4/2012 | 7:59:30 PM
re: Waiting for Cisco I have full confidence in Cisco's accountants' ability to fudge their numbers into optimistic figures.
Go Cisco!
rafaelg 12/4/2012 | 7:59:29 PM
re: Waiting for Cisco "If enterprise customers are still buying routers, then they're also buying bandwidth to connect those routers" Cfaller.

I admire your optimism.

:-)
mu-law 12/4/2012 | 7:59:27 PM
re: Waiting for Cisco "I have full confidence in Cisco's accountants' ability to fudge their numbers into optimistic figures. "

God I hope so, after writing down multile $B in giveaways last quarter. If they don't, its time to rethink those positions.


The Carmack 12/4/2012 | 7:59:22 PM
re: Waiting for Cisco http://biz.yahoo.com/bw/010807...

Where is the scathing article? Post it quick before words like "objectivity", "integrity" and "bias" start pouring in!
whose 12/4/2012 | 7:59:22 PM
re: Waiting for Cisco Cisco closed at $19 and change. A historical PE for corporations is around 16. Cisco has over 7M shares outstanding. To achieve the historical PE, Cisco would have to earn over $8.3B. Cisco is on a revenue run rate of $18B/year. If Cisco grew 30% for the next three years and achieved an ROS of 10% in year three, then it would have revenue of $40B and earnings of $4B, at PE of 20, share price would be $11.60. Will Cisco grow 30%? achieve 10% ROS? If Cisco stays at $20/share is a PE of 34 acceptable three years forward (assumes no growth).

The bottom line is that Cisco is overpriced by stock fundamentals at todays price. Ignore the fundamentals and you'll regret it.
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