Cisco inferno hits techs

February 7, 2001: 5:21 p.m. ET

A disappointment from Cisco Systems spreads far and wide

NEW YORK (CNNfn) - Networking equipment stocks tumbled Wednesday after Cisco Systems surprised Wall Street with an earnings shortfall -- its first in more than three years.

Cisco, the leading supplier of the networking equipment that guides data traffic over the Internet, missed forecasts by a penny per share. Further, executives said the company's revenue-growth rate for the current fiscal year would come in well below previous expectations.

Shares of Cisco (CSCO: Research, Estimates), which reported its fiscal second-quarter results after Tuesday's close, tumbled $4.69, or 13 percent, to $31.06

John Chambers, Cisco's chief executive, had been signaling for weeks that the company's business had been sluggish during the quarter, so the miss did not come as a complete surprise. Still, it was the first time since 1994 that Cisco fell short of the Street's consensus earnings estimate. And in each of the past 14 quarters, Cisco has beaten the Street by exactly a penny.

But the news prompted downgrades from several brokerages, including Lehman Brothers, which reduced its rating on the company's shares to "buy" from "strong buy," and Morgan Stanley Dean Witter, which changed its recommendation to "neutral" from "strong buy."

At the same time, analysts at Josephthal & Co., Thomas Weisel Partners and Salomon Smith Barney reiterated their existing ratings on Cisco.

"Its not surprising that weak economic conditions pressure cyclical companies and Cisco is not immune," Salomon Smith Barney analyst Alexander Henderson, who maintained a "buy" rating on Cisco, wrote in a note to clients Wednesday.

"But with interest rates declining, we think Cisco shares will hang tough near-term and then rally as the economic picture improves," Henderson added.

More than 280 million Cisco shares traded, the second-heaviest day for a Nasdaq stock. The record is held by Intel, which on Sept. 21 traded more than 300 million shares.

Meanwhile, most of Cisco's competitors in the data-networking equipment market were moving lower as well.

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Shares of Lucent Technologies (LU: Research, Estimates) shed 85 cents lower at $17.01. Nortel Networks (NT: Research, Estimates) shares fell $2.42 to $33.09. Juniper Networks (JNPR: Research, Estimates) slipped $7.69 to $94.38.

Cisco's earnings miss and weaker revenue-growth outlook also threw a ripple throughout the electronics supply chain, weighing on semiconductor and other component suppliers as well.

Shares of PMC-Sierra (PMC: Research, Estimates), a communications chip maker that derives roughly 40 percent of its business from Cisco, lost $8 at $59. Applied Micro Circuits (AMCC: Research, Estimates), another leading communications chip supplier, fell $5.25 to $49.81.

When it reported its latest results, Cisco said its inventory levels had risen 29 percent from the previous quarter, while sales rose 4 percent. Lehman Brothers analyst Dan Niles said Wednesday that lends further evidence to his theory that the inventory issues facing semiconductor suppliers will get worse in the first quarter.

"Cisco's inability to reduce its inventory after the October quarter when revenues grew 14 percent quarter over quarter and inventory grew by 59 percent quarter over quarter reaffirms our view that we have not yet seen the worst of the inventory correction for semiconductor suppliers," Niles said.

Elsewhere among communications chip makers, TranSwitch (TXCC: Research, Estimates) shares lost $4.31 to $35.44. Vitesse (VTSS: Research, Estimates) fell $1.50 to $62.75.

In a note Wednesday, Joe Osha, who covers chip stocks for Merrill Lynch, said the sector's worst problems are not yet behind it. Still, Osha remains upbeat over the long-term.

The Philadelphia Stock Exchange's semiconductor index, or Soxx, was down 26.63 points at 636.46.

Meanwhile, shares of Sun Microsystems (SUNW: Research, Estimates) fell $1.25 to $26.56. At the company's analysts meeting, Sun's management signaled that the U.S. market remains soft and they are seeing weakness across all their product lines. They also said that sales in January were comparable to those in December, which was a weak quarter for most technology companies.

Several brokerages issued cautious comments on Sun following the meeting, including Prudential, which lowered its 2001 revenue and earnings estimates, and ABN Amro, which reduced its price target on Sun shares to $40 from $50, saying it expects the company to ratchet down its current financial targets for the year.

But not all tech stocks fell.

Shares of IBM (IBM: Research, Estimates), which has been aiming to overtake Sun as the leading supplier of the large computer systems called Unix servers that make up the backbone of the Internet, edged up $2.85 to 116.91.

Microsoft (MSFT: Research, Estimates) shares rose $2.13 to $64.69. The Financial Times reported Tuesday that the software leader may take a minority stake in a $70 billion deal between News Corp. and General Motors' Hughes Electronics.