Wall Street sees a Cisco treat?
msnbc.com
Wall Street sees a Cisco treat?
Some analysts cite faint upturn signs for network-gear maker
By John W. Schoen
MSNBC
March 22 — After a long, cold winter for Cisco Systems, is the freeze on spending by some of its customers beginning to thaw? Some analysts who follow the company have said as much in recent days. But with the telecom industry mired under hundreds of billions in debts, Cisco shareholders will likely have wait awhile before business heats up again for the world’s biggest maker of computer networking equipment.
CISCO STOCK IS up 5 percent in the past four sessions on early signs that, after a long dry spell, customer orders may be picking up again. On Friday, analysts at D.B. Alex Brown said they’re seeing signs of a pickup in demand for computer networking gear from Cisco’s large corporate customers. On Monday, Lehman Brothers said independent checks of the inventory pipeline showed that orders in the usually slow first quarter are picking up. Salomon Smith Barney analysts also see signs of a pickup in demand for Cisco’s so-called enterprise customers — big companies that install computer networks for their own use.
Orders typically pick up in the final weeks of a quarter, but analysts who are bullish on Cisco think the upturn may have some staying power. The optimistic outlook is based largely on signs that the U.S. economy may be pulling itself out of recession. In recent weeks, reports showing a pickup in manufacturing and a drop in unemployment suggest that the economic slowdown that began last fall may be over.
But Cisco’s big telecommunications customers — so-called “service providers” — are still stuck in one of the industry’s deepest recessions ever, and the end is nowhere in sight. Some $2 trillion was raised by the industry over the past five years to build out huge fiber optic networks, expand the Internet’s reach and offer local phone service.
Now, with even the biggest of these new players like Global Global trying to work out survival plans in bankruptcy court, established players like AT&T and the regional Bell companies have sharply cut spending on new equipment. Many of the new entrants to the field that fueled Cisco’s growth in the 1990s are gone. And with lenders loathe to give any more money to those left standing, the survivors are conserving whatever cash they still have.
Overall, capital spending by the telecom industry continues to dry up. Merrill Lynch estimates spending will fall another 26 percent for 2002 and continue falling next year.
As the unwinding of the industry’s mountain of debt continues, it’s impossible to predict how long it will take for the industry to right itself — and, when it does, what the demand will be for Cisco’s gear. Bullish analysts suggest that Cisco is well positioned to equip the next big phase of telecom network building — the so-called “metro” market devoted to routing data traffic within cities. But there is little sign of that happening yet.
That’s why Cisco’s brightest opportunity lies in its other big chunk of business — convincing corporate customers to upgrade their computer networks to save money. This so-called “enterprise” market makes up about 35 to 40 percent of the company’s overall revenues, according to Lehman Brother analyst Tim Luke.
“They’re very effective consultants — working with major corporations to help them scope out where they can get better returns on their investment,” said Martin Pyykkonen, who follows the company at C.E. Unterberg Towbin.
Pyykkonen says that, during the 1990s tech spending boom, some industries were quicker than others to upgrade their information networks. Now, as slow-adopters like manufacturing industries see a rebound, he said, they’ll be able to start spending again on modernizing computer systems like inventory control and data sharing with customers.
Cisco is also benefiting from its competitors’ pain. As they continue to struggle with the drop in capital spending from the telecom industry, Cisco rivals like Nortel Networks and Lucent Technologies recently have cut their earnings forecasts. Cisco’s smaller rival, Juniper Networks, has been losing market share. Meanwhile Cisco has been “holding prices and perhaps even edging them higher by narrowing discounts,” according to Salomon Smith Barney telecom analyst Alex Henderson.
While Cisco is in relatively good financial health — it had $5.3 billion in cash at the end of January and generated nearly $3 billion in free cash flow in the latest quarter — many of it’s telecom customers are not. Last week, for example, one of Cisco’s big customers, fiber-optic networker Velocita, became the latest telecom player considering bankruptcy protection among other “strategic alternatives.” The company, which cut 75 percent of it workforce last month, borrowed $285 million last year from Cisco to buy equipment. Cisco also invested $200 million in the firm. (Cisco says it has already set aside reserves to cover any possible losses if Velocita files for bankruptcy.)
That Velocita investment was just a rounding error in the multi-billion spending spree that saw Cisco gobble up more than 70 companies during the telecom boom. Now, with investors poring over corporate filings with a microscope, Cisco’s accounting for those acquisitions is getting a closer look.
To mollify concerns, Cisco has begun offering up a bit more detail in its accounting; the latest quarterly 10-Q earnings filing included a more precise revenue breakdown to satisfy analysts questions about where Cisco’s current revenues are coming from.
But Cisco is still making acquisitions — and remains stingy with that information. It recently provided the barest details about its investment in four small private companies — three of which it plans to acquire outright in the next six months in a so-called “spin-in.” In its latest 10-Q filing, the company says the cost of those four acquisitions could amount to as much as $3 billion in Cisco stock. |
