Cisco shares fall on weak spending outlook

Shares of networking giant Cisco Systems fell Wednesday after the company delivered a subdued outlook for its future on a quarterly conference call.

On Tuesday, Cisco reported record quarterly profits on strong sales, but comments from company CEO John Chambers about customer caution and the company's lackluster sales projections for the near future put many investors in doubt.

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On Wednesday, at least two investment banks downgraded the company's stock. Merrill Lynch lowered its rating from "buy" to "neutral." JP Morgan Chase lowered its rating from "neutral" to "overweight."

Cisco shares closed down $2.17, or 10.6 percent, to $18.29 in Wednesday trading.

Cisco executives said during the conference call that they expect sales to be flat or up only slightly in the current quarter, which has traditionally been a weak one for the company. Chambers also said that some enterprise customers are concerned about the general economy.

The news did not sit well with analysts and investors.

"Despite strong order growth in some divisions, the guidance for next quarter is a lackluster 0 to 2 percent," Tal Liani, an analyst with Merrill Lynch, said in a research note to investors. "Our discussions with market participants lead us to believe that visibility is getting worse into the next quarter."

Analysts also were concerned with Cisco's inventory levels, which rose about 8 percent from the previous quarter. Inventories were up 20 percent in the third quarter. This build-up of inventory will likely affect investors' view of Cisco suppliers in the semiconductor space.

Cisco reported a profit in its fiscal fourth quarter of $1.4 billion, or 20 cents a share, compared with $982 million, or 14 cents a share, in the year-earlier quarter.

Excluding one-time items, the company earned 21 cents a share. Sales in the fourth quarter rose 26 percent to $5.93 billion from $4.7 billion last year. Analysts were expecting Cisco to earn 20 cents a share before one-time items on sales of $5.89 billion, according to Reuters estimates.

Much of Cisco's revenue growth during the quarter came from its traditional business units, Ethernet switching and IP routing. This had been expected as many analysts predicted strong sales in these product categories. But Cisco's new Advanced Technologies group, which includes security, IP telephony, storage area networking and wireless products, did not perform as well as some analysts had hoped.

While revenue in the Advanced Technologies segment of products grew 70 percent from the previous year, quarterly growth decelerated sequentially throughout 2004, Liani noted. The growth rate fell from 20 percent in the first quarter of 2004 to 5 percent in the fourth quarter, he said.

Security, which brings in about $1 billion in revenue each year, is the biggest piece of Cisco's Advanced Technologies product segment. Revenue for these products actually declined from the previous quarter by 2 percent, according to Liani. Meanwhile, revenue in IP telephony, wireless and storage grew.