Cisco Outlook More Crucial Than Results
By Ben Klayman
CHICAGO (Reuters) - New Economy bellwether Cisco Systems Inc. (NasdaqNM:CSCO - news) will report fiscal third-quarter results on Tuesday, but investors and analysts have their eyes on the future instead as everyone looks for the bottom of the current economic slowdown.
The San Jose, California-based company, which makes gear that helps power the Internet, last month warned that its third-quarter results would be far below forecasts. It also said it plans to cut 8,500 jobs, or 17 percent of its work force, and take charges of as much as $3.7 billion.
Other than such details as what products will be discontinued and how many of the targeted jobs have been eliminated so far, the quarter that ended April 28 is already ancient history to portfolio managers and analysts.
``Really it almost doesn't matter how ugly this quarter's number is as long as they can give pretty decent forward guidance,'' said Kevin Landis, portfolio manager with mutual fund company Firsthand Funds.
Nevertheless, analysts and portfolio managers said they will dissect the third-quarter results for items such as more details on the $2.5 billion inventory write-down, what products will be discontinued, its revenues by segments, how much cash Cisco has on hand and whether it will buy back shares.
``I'm going to be listening for signs that they've got their arms around the business,'' said David Brady, portfolio manager of the Liberty-Stein Roe Young Investor Fund.
Cisco's stock was up 98 cents to close at $19.64 in Nasdaq trading. Over the past year, it has underperformed Standard & Poor's 500 index by more than 65 percent.
Cisco said on April 16 it now sees third-quarter earnings before one-time items in the ``very low'' single-digit range and that sales will fall 30 percent to about $4.72 billion from $6.75 billion in the second quarter. It also said sales in the fourth quarter would be flat to down 10 percent sequentially.
For the third quarter, analysts now expect Cisco to earn 2 cents a share before one-time items, with a range from nil to a gain of 4 cents, according to Thomson Financial/First Call. That's down from a pre-warning estimate of 8 cents.
The warning marked Cisco's largest-ever earnings miss and the first time sales have declined on a sequential basis as a public company.
It is only the second time the networking giant has missed earnings forecasts, the first being the second quarter. In the past, Cisco had consistently exceeded analysts' estimates by exactly one penny.
``They've taken the numbers down multiple times. They've announced layoffs. They've exited the optical business and they've lowered fiscal third quarter, fiscal fourth quarter, full year,'' said Justin McNichols, portfolio manager with Osborne Partners Capital Management. ``Now, it's just make the number and don't announce any more surprises.''
He has added to his Cisco holdings in the last month.
Cisco said in April the slowdown has spread overseas and will continue for at least three more quarters. Its struggles bode ill for the networking and communications industries, analysts said.
Lucent Technologies Inc. (NYSE:LU - news), Nortel Networks Corp. (NYSE:NT - news)(Toronto:NT.TO - news) and Cisco's other rivals have all either announced large job cuts or issued profit and sales warnings.
Even some of Cisco's smaller, more nimble competitors, such as Juniper Networks Inc. (NasdaqNM:JNPR - news), have seen business slow as well and networking start-ups are finding it far more difficult to tap venture capital to build out their businesses.
Investors just want to know when the stock market and technology stocks will hit bottom and start climbing again, and Cisco could provide a clue for when that will happen.
``Was April better than March? Was March better than February? How do things look right now for May?'' said Tim Ghriskey, senior portfolio manager with mutual fund company Dreyfus Corp.
Firsthand's Landis said investors want to buy back in before the expected rise. ``Basically it's just an exercise in figuring out which stocks are people going to be kicking themselves over in a couple years.'' |
