After the bell comments on CSCO & NT:
Cisco Systems (CSCO) 17.20 -0.78: That Cisco warned was no surprise. Even the magnitude was not altogether shocking; in an In Play comment on April 6, Briefing.com noted rumors that the expected Cisco warning would include a sequential revenue decline of 30%, which is precisely what Cisco delivered. But despite all of the signs that this was coming, it was still sobering to see this warning from this company. CEO John Chambers said that the 30% Q3 (Apr) revenue decline "may be the fastest any industry our size has ever decelerated." Adding to the grim picture was the expectation that Q4 (Jul) revenues would be flat to down 10% and the announcement of a $2.5 bln inventory writedown. The inventory writedown in particular shocked many, and with 80% of those inventories in the form of components, it painted a bleak picture for the comm IC suppliers to Cisco such as VTSS, PMCS, and AMCC. As has been the case with so much bad tech news of late, the magnitude of Cisco's decline prompted the obvious question: is this the bottom? In response to that question, Chambers said he was optimistic, but that he couldn't offer any evidence to support that optimism. Of all the market trends we have witnessed recently, the most frightening is the desire to forecast a bottom based solely on the premise that "it couldn't get much worse." There are two dangers with this way of thinking. First, it can get worse. Unit demand can fall further, and a price war -- which has thus far been averted -- could easily break out if the downturn continues much longer. Second, the real question is not the precise timing of the bottom in revenues. The issue is when or even if Cisco's expected 30-50% market growth rate will return. As we have been consistently arguing, there is good reason to believe that business investment will stall for a longer period and that 1999/2000 growth rates might never return. US businesses boosted investment far beyond historical norms over the past two years. Many of Cisco's customers will fail, with their Cisco products then hitting the resale market. Those that survive have in many cases bought Cisco gear in anticipation of demand that has not materialized. It will take time for these excesses to be corrected. The key to valuing Cisco and its competitors is to avoid the assumptions that 2000 revenues were the base off of which the future should be measured and that 30-50% is the long-term market growth rate. The 2000 revenue levels and growth rates were part of the Nasdaq bubble, and we still haven't figured out exactly where Cisco's true base lies. Is it at $4.7 bln? Or maybe the $3 bln area seen in 1999? We don't know yet, and until we see an upturn in demand, we won't know. Simply being down a lot is not sufficient reason to believe that it must go up. Cisco ended after hours trading at 15.75. - Greg Jones, Briefing.com
-------------------------
Nortel (NT) 15.30 -1.30:
Inventories may be down, but pricing and end-user demand are more important; still no sign of a turn
Brokerage firm comments ignited the debate:
NT rallied Thursday after comments from one brokerage firm that WDM component inventory was down to a normalized 6 weeks from 12+ weeks in January
Thomas Weisel and Robertson Stephens have since responded with cautious comments on the inventory drawdown
Weisel says NT might be pushing inventory off books; Robbie says NT might be purchasing again, but only in small amounts
Several reasons not to get excited about this inventory talk, which is still only talk:
WDM (wavelength division multiplexing) components are only one product line and represent a small piece of NT business
Normalized inventories would be good, but that would only mean that sales can grow at the pace of end-user demand
End-user demand therefore still the key, but no indication that a pick-up is imminent
Telecom service provider customers experiencing financial difficulties
Enterprise customers seeing slower demand themselves, and suffering from investment hangover after past two years
Finally, pricing might well become an issue given current excess industry capacity
Drawing down inventories is a good thing, but current valuation discounts renewed growth in end-user demand, and there is no sign of that yet, nor do we expect such a sign soon
Greg Jones, Briefing.com |
