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Street sweats Cisco's sales
No. 1 network gear maker posts strong profits but sales miss forecasts.
February 9, 2005: 11:07 AM EST
By Paul R. La Monica, CNN/Money senior writer
Cisco is trading near its 52-week low but the stock looks poised to fall further after missing 2Q sales estimates.
Cisco is trading near its 52-week low but the stock looks poised to fall further after missing 2Q sales estimates.

NEW YORK (CNN/Money) - Cisco Systems used to be the company that Wall Street counted on to beat earnings estimates every quarter.

But for the second consecutive quarter, Cisco simply matched consensus forecasts. And Wall Street was, at first, was not in a forgiving mood.

Shares of the No. 1 maker of Internet and network gear were at one point down more than 3.5 percent in after-hours trading, according to INET, after the company reported net income jumped 93 percent and sales grew 12.5 percent in its fiscal second quarter ended Jan. 29.

The stock recovered some of its losses, though, and was down only about 1.2 percent following the end of the company's conference call with analysts.

The reason for the stock's drop was this: Cisco's (Research) sales came in a touch below consensus forecasts. The San Jose, Calif.-based company reported sales of $6.06 billion, up 12.5 percent from a year earlier, but below analysts' forecasts of about $6.12 billion, on average. The company also gave tepid sales guidance for the third quarter.

"This is a marginal disappointment. Revenues were slightly shy," said Erik Suppiger, an analyst with Pacific Growth Equities.

Suppiger added that gross margins, a measure of how profitable a company is after subtracting the cost of sales, were lower than expected as well. Gross margins came in at 66.9 percent. Most analysts were expecting a number north of 67 percent.

Cisco's sales miss is likely to cast a pall on the overall tech sector Wednesday. The company is seen as a tech bellwether since many of its customers are large corporations.

As such, other large tech firms, including Intel (Research), Oracle (Research) and Dell (Research), which will report its fiscal fourth-quarter results on Thursday, also traded slightly lower after-hours.

Cisco rivals Juniper Networks (Research), Extreme Networks (Research) and Foundry Networks (Research) all dipped in post-market trading as well.

Drake Johnstone, an analyst with Davenport & Co., said investors were also probably unhappy with the slight ramp up in inventories that Cisco reported. Inventories as of the end of January were up about 3.7 percent from the end of October.

That's not a huge increase but sales rose just 1.5 percent from the prior quarter, suggesting that demand for Cisco's products was not as robust as the company had hoped.

Newer businesses growing fast but Chambers is still cautious

During a conference call with analysts Tuesday, Cisco CEO John Chambers conceded the company would like to see its year-over-year sales growth rates return to levels in the mid-teens, versus the low-teens the company has been posting lately.

"Similar to all of you, we would like to see higher growth," Chambers said.

Cisco's stock has slumped lately due to concerns about increasing competition in its core markets of selling switches and routers as pricing pressures are apparently taking a toll on profit margins. In addition to companies like Juniper, Extreme and Foundry, Cisco faces tougher competition from Asian upstarts, most notably China's Huawei Technologies.

But during the conference call, Chambers highlighted the performance of Cisco's six so-called advanced technologies divisions, newer divisions that Cisco is focusing on because of their stronger growth potential.

To that end, sales of storage equipment surged 70 percent from a year ago. Revenues from the company's home networking and Internet telephone equipment divisions both increased 40 percent on a year-over-year basis while sales from Cisco's wireless, optical and security segments each increased 30 percent from the same period last year.

Nonetheless, Chambers, whose comments about corporate spending during the company's quarterly conference calls are closely scrutinized by investors, maintained a fairly circumspect tone about the state of the economy.

Chambers said that he was "cautiously optimistic" that the positive momentum the company saw in spending from large so-called enterprise customers in the U.S. during the quarter could continue. But he added that it was still "too early" to say whether the momentum was sustainable.

Later on during the call, Chambers said it wouldn't be until well into the company's fourth quarter, which ends in July, when he would have a better indication of just how strong capital spending may be this year.

With that in mind, Chambers said he expected Cisco's fiscal third-quarter sales to be flat to 2 percent higher than the second quarter. That implies a range of $6.06 billion to $6.18 billion, below the consensus estimate of $6.23 billion. The company added that gross margins should be approximately 67 percent in the third quarter.

But Susan Kalla, an analyst with Friedman Billings Ramsey, said that Chambers actually sounded a bit more positive when talking about the prospects for an economic pickup than he has in previous quarters. For this reason, she thinks investors should be heartened, adding that Cisco is the safest play in the networking equipment sector.

"Cisco is doing well in a difficult market. The business is predictable," Kalla said. "The company gave some clear indication that they see a turn coming."

Analysts quoted in this story do not own shares of the companies mentioned and their firms have no investment banking ties to the companies.  Top of page

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