To: MulhollandDrive who wrote (3750 ) 4/16/2001 11:51:29 PM From: John Pitera Read Replies (1) | Respond to More on CSCO....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.comSo-called great managers like Chambers have "never managed during difficult times," Brotman observed. "In retrospect, people [like Chambers] were good at predicting that if they were operating at full capacity and where demand oustripped supply, they would sell all their supply." Contrast that with a normal environment where you never have real "visibility."
