we all have out crosses to carry......Cisco's Unenlightening Call
09-May-01 00:14 ET
[BRIEFING.COM - Gregory A. Jones] Is it possible to listen to a two hour conference call and come away with nothing? If it was last night's Cisco (CSCO) call, the answer is yes. If you had listened to the company's April 16 preannouncement, you didn't need to listen to this call, because you learned almost nothing new: business in the April quarter was terrible, business in the July quarter will be worse, and no one has any clue what business will be like beyond that.
No News
Much of what we heard in the Cisco call was a repeat of the April 16 call. Here are a few of the important, but old, news items.
Revenues fell nearly the 30% from the Jan qtr that Cisco had anticipated, and the July quarter is still expected to be flat to down 10%. For FY02 (July), Cisco offered no useful guidance, saying only that the current range of analysts' estimates was probably wide enough -- but it's so wide as to offer no guidance at all.
Margins fell to 54.5%, consistent with guidance in the low-mid 50% area. Expect more of the same in the next couple of quarters before what Cisco hopes is a recovery next calendar year.
Inventories were $1.9 bln, which was above guidance of $1.6 bln, but that added amount was precisely offset by a smaller than indicated inventory writedown of $2.2 bln (guidance was $2.5 bln). Before anyone gets excited about the smaller writedown, note that Cisco itself downplayed this factor, saying that it had been very conservative with its initial estimate. There was no hint that the smaller writedown was due to expected improvement in sales.
The Good News
The good news section is hardly even a section, but for the sake of symmetry, we had better try.
The bottom may arrive in the next 1-2 quarters. CEO John Chambers could not offer any firm evidence of a bottom, but he nevertheless used the word several times in what seemed more like wishful thinking than informed projecting.
DSOs, or days sales outstanding, fell to a healthy 38 days from 47 days in the prior quarter. Cisco's sales may be down, but at least the sales that it is booking are to sound customers.
Stock prices recover before the business does. This is a real stretch for good news, but Chambers actually parroted the rallying cry of Morgan Stanley analyst Chris Stix, who noted in his upgrade of Cisco that networking stocks would probably turn higher 1-2 quarters before the fundamentals. It's one thing for an analyst to try and make the stock call, but we can't even imagine why Chambers was getting into the stock forecasting business. This actually seems more like a management distraction than good news to us, but some will no doubt cheer Chambers' bullish hint.
The Bad News
There is plenty of fodder for this section, but we'll try to stick to the highlights.
Enterprise business, contrary to the optimistic forecasts of a pick-up heard recently, continues to weaken. Chambers said that many key industries, such as tech, financial, and manufacturing, remain "under pressure."
Service provider business is unimaginably bad. Chambers noted that in the alternative service provider market (where Cisco made its biggest inroads into the service provider business), orders fell from a quarterly pace of about $500 mln over the past year to roughly $125 mln in the April quarter. He thought that this business might have bottomed, though that forecast appeared to be based primarily on how close the number got to zero rather than any firm indications of improving demand.
Europe and Asia are following the US down. In the entire call, we heard mention of only two positive geographies: China and India. Chambers said that Europe had seen a "dramatic change since the February timeframe" and that Japan was down over 30%. Given that the US is still weakening, it's safe to say that the lagging regions -- Asia and Europe -- have further to fall.
Inventories are still bloated. Even after the $2.2 bln writedown, inventories were over $1.9 bln. For comparison purposes, note that inventories were just $878 mln in the year-ago period when revenues were at a comparable level. Further writedowns are not out of the question.
The Conclusion
As we said at the outset, this report was a major disappointment for those who had hoped it would unlock the keys to the future. To the extent we learned anything, it was that recent suggestions of an upturn in the enterprise business were not validated by Cisco management.
The message from Cisco pretty much mirrored the message from the market: we hope that a bottom is coming in the next 1-2 quarters, but there is no evidence of it yet. For our part, we would note that so long as you're still headed down, it's tough to know when you'll head back up. It's all guessing at this point, and with Europe and Asia only recently joining the downturn and service providers unlikely to recover for a couple years, we see no catalysts to boost Cisco's stock. With a forward P/E of over 60, falling sales, rising inventories, and no visibility, there's not much to like here.
Parting Shot
Options pricing: There was much ado in the markets Tuesday about the possibility that Cisco might have priced employee options in recent days, the perception being that this would indicate that management sees a bottom in the stock price. We know now that this didn't occur, but the more important question is this: why would anyone think that the same management team that piled up over $4 bln in inventories could accurately project the bottom in the stock? |
