Cisco Gives the Bears a Rude Awakening

Although Cisco Systems delivered a good first quarter earnings report on Wednesday afternoon, the guidance delivered by CEO John Chambers for the coming quarters sent the stock markets spinning downward on Thursday.

In a conference call Wednesday, Chambers said Cisco expected revenue growth of 3 percent to 5 percent during the current quarter. Wall Street was projecting close to 13 percent.

Cisco declined to comment to the E-Commerce Times.

By Thursday, Cisco had lost 17 percent, or US$23 billion, from its market cap, its worst one-day performance since 1994, when the company lost more than 17 percent on July 14. Two hundred million shares of Cisco changed hands in 30 minutes Thursday morning. The company dragged down stocks on the Nasdaq by 2 percent and drove the Dow Jones Industrial Average down 105 points or nearly 1 percent.

The guidance by Chambers that set the bears loose on the stock market pointed to uncertainties in the economy, as well as weakness in the set-top box market, government entities, service providers and European businesses.

During the earnings conference call, Chambers explained that Cisco hit “a couple of air pockets” that he didn’t see coming.

Cisco’s first quarter performance wasn’t actually bad. The company reported net income of $1.9 billion, or 34 cents a share. Revenue for the quarter was $10.75 billion, up 19.2 percent from a year ago. Wall Street was expecting 42 cents a share with revenue of $10.74 billion.

Deutsche Bank Downgrades Cisco

Germany’s Deutsche Bank downgraded Cisco’s stock from Buy to Hold on the guidance. While Deutsche noted it still believed in the strength of Cisco’s technology, the bank was concerned about the company’s near-term stability.

Deutsche said Cisco had a sound strategy and an advanced technology road map, but it was concerned that Cisco’s new products might not be able to ramp up fast enough to offset normal price declines. The bank said it could take several quarters for Cisco to work through its difficult numbers.

Why Was Cisco Surprised?

What shook the market most may have been Chambers’ indication that he didn’t see this coming.

“The fair issue to take with Cisco is why they were surprised by the downturn in the public sector and the cable market,” said Azita Arvani, principal of the Arvani Group.

“The fact that they were surprised was really what spooked the market,” she told the E-Commerce Times.

“At the same time, whose crystal ball could have revealed that many municipalities were going to have problems balancing their budget? Or, that the physical infrastructure projects — like fixing potholes, etc. — would take priority over technology and networking upgrades?” Arvani wondered.

Is Cisco the Problem? Or the Tech Sector? Or the Economy?

One big question is whether the warning from Cisco indicates the company has a product-mix problem.

“Yes, and it may mean they are now incurring some of the economic costs related to their going into the server business, which resulted in stronger competitive positioning against them by companies like HP, Oracle, IBM, and Dell who were mostly neutral or even partners before,” Rob Enderle, principal analyst at the Enderle Group told the E-Commerce Times.

The response from the stock markets also points to potential overarching problems with the tech market in general.

“Cisco is a bellwether — but in this instance, when they went into servers, they shifted the market dynamic around them very dramatically,” said Enderle, “and what we may be seeing is the beginning of the full cost of that shift. So this could be at least partially isolated to Cisco and tied to decisions they made, as opposed to being a statement about the economy in general. They picked up a lot of very powerful competitors very quickly, and it may take a while for the company to recover from that.”

While the markets were shaken by Cisco’s guidance, the overwhelming view among stock pickers and analysts is that Cisco will eventually recover well from its stumbles.

“Sure, Cisco may have problems in accurately predicting their numbers in the next two to three quarters,” said Arvani. “That might not be good for market speculators. But overall, I have all the confidence that Cisco will rise above the ‘air pockets’ into smooth gliding.”