Cisco Seen 2Q Results In Line, At Most 1-2c
Above Views
By Joelle Tessler
NEW YORK (Dow Jones)--Cisco Systems Inc. (CSCO) is expected to
report fiscal second-quarter results that are in line with or, at most, 1 or to
2 cents above the Wall Street consensus view after the market closes
Tuesday.
Traders and analysts said they aren't expecting the networking bellwether
to deliver any major surprises when it reports earnings for the three months
ended in January. The consensus estimate on Cisco is for earnings of 42
cents a share, compared with 34 cents a year earlier.
"I have a lot of confidence that they're going to make this number," said
Lazard Freres analyst Michael Duran, who projects that the San Jose
company will report 41 cents a share.
Still, Erik Suppiger, a research associate at Deutsche Morgan Grenfell,
pointed out that the company is unlikely to blow away expectations since it
is "pretty good at managing its numbers."
Duran added that since the outlook for the networking industry is foggy
right now - due in part to the economic turmoil in Asia - and since Cisco
wants to be able to maintain its rapid growth rates, "if they have extra
revenue, they may want to save it."
"They don't want to add a lot of hype," he said.
3Com Corp. (COMS) and Cabletron Systems Inc. (CS) both have
quarters that end a month before the rest of the networking group and kick
off the reporting season for the sector. After the two companies
prereleased disappointing earnings for their November quarters, some
observers were concerned that industry conditions hadn't picked up much
after a weak 1997 first half.
Investors therefore are likely to be relieved as long as Cisco doesn't fall
short of expectations, one analyst noted.
"They will be pleased if they just come in in line," he said.
Others noted, however, that as the reporting season has gotten into full
swing, a number of other networking vendors have delivered respectable
results. And Cisco shouldn't be any different.
Xylan Corp. (XYLN), for instance, posted fourth-quarter earnings of 14
cents a diluted share, up from 11 cents a year earlier. Bay Networks Inc.
(BAY) reported operating earnings of 27 cents a diluted share for its fiscal
second quarter versus 10 cents last year, although the company's warning
that seasonality could impact its third quarter numbers did unnerve
investors.
Most important, analysts agreed, will be the tone of Cisco's comments
about its business since it is a bellwether for the networking group.
Noting that "a stable, consistent performance from the bellwether of the
industry is really important," Hambrecht & Quist analyst Farrokh Billimoria
predicted that Cisco's "tone of business will be reasonably upbeat."
He said the company will probably point to its alliance with US West
Communications Group (USW) as evidence of this. Last week, U S West
said it will "extensively use" Cisco equipment in a nationwide build-out of an
integrated voice-data network, and in its integration services.
Investors also will look closely at the quality of Cisco's earnings, including
the linearity of its results, its book-to-bill ratio, inventory turns and days
sales outstanding.
Deutsche Morgan's Suppiger expects the company's gross margins to fall
by 10 basis points to 65% in the second quarter from 65.1% in the first
quarter.
He added that investors will scrutinize Cisco's finished-goods inventory
levels in particular. The company worried investors in December when in a
filing with the Securities & Exchange Commission it reported that
finished-goods inventory rose to $69.7 million in the quarter ended Oct.
25, from $21.7 million in the preceding quarter.
Yet Suppiger said the increase was "completely understandable" since the
company has been building some inventory to respond to reduced lead
times.
He said Cisco has been expanding its presence in the small- and mid-size
business market, which generally buys equipment through indirect sales
channels.
Yet the company does not recognize revenue until the inventory sells out of
the distribution channel. It instead keeps inventory held in the distribution
channel on its balance sheet - and this shows up in higher finished goods
inventory levels.
This is courtesy of Dow Jones News Wires....
JRH |
