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Cisco can't deliver the old magic
graphic February 6, 2002: 7:24 p.m. ET

The numbers were solid, but the forecasts are dull as dirt.
By Adam Lashinsky
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SAN FRANCISCO (CNN/Money) - There was a time when listening to a Cisco conference call opened the door to a wealth of information. A listener could hear Cisco CEO John Chambers wax eloquent on the state of the technology industry, the latest areas of investment and even which heads of state he was convincing to wire their countries with networking gear. A Cisco call also provided the investment community with a quarterly dollop of enthusiasm as wildly optimistic growth rates convinced investors they lived in the best of all possible worlds.

No longer.

Now Chambers and his minions ramble on about highly technical matters the average Cisco shareholder never understood. They talk incessantly about how they are accounting for their revenues and their excess inventories. (This is the revenge of Regulation FD and open conference calls: Amateurs, bored to tears, likely will stop paying attention.) World leaders come into play only when Chambers is goaded by analysts into talking about the government sector.

That was the case Wednesday night, when Cisco executives talked about results for the fiscal second quarter (which closed on Jan. 26). Chambers and chief financial officer Larry Carter spoke only about the next quarter, when revenue growth from the second fiscal quarter is expected to be nil or in the low single digits. "Our visibility is still very limited," said Chambers, providing little meat to hungry analysts. He added, "If there's one lesson we've learned over the past year, it's how quickly things can change."

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    Still, there are rays of hope. Cisco generated $2 billion in cash in its second quarter, boosting its total to $21 billion. That's nearly five times the total market capitalization of arch-foe Juniper Networks, and explains why Juniper ought to be quaking in its boots over the market share it's suddenly losing to Cisco.

    Another goody is that Cisco has been effectively paying a dividend in the form of stock buybacks. The company spent $600 million buying back its own shares since Sept. 17, when markets re-opened following the terrorist attacks on New York. It paid an average price of $15.15, making it a good investment so far, given Wednesday's closing price of $18.61. (In after-hours trading, the stock was down a little more than 7 percent.) Cisco also says it has disposed of nearly all the $2.2 billion in excess inventory it famously wrote down last year.

    To its credit, the company added back $195 million to its pro forma earnings for the quarter because of inventory that ultimately shouldn't have been written down. Lesson learned: When used correctly, pro forma reporting gives a clearer picture of a company's financial health. It's not necessarily always used to obfuscate.

    So where does this leave Cisco? In a position of financial strength, gaining share from its rivals -- and stuck. Since November, its stock has been trapped at or around $20, giving it a valuation of about 87 times forecasted fiscal 2002 earnings and 50 times fiscal 2003 projections.

    Those are healthy multiples for a company that can't promise robust earnings growth. Thus the stall and the lack of excitement. Then again, who ever got the idea there was anything particularly exciting about a company that makes switches and routers?

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