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THE DAY AHEAD: Cisco steals some Election Day thunder

COMMENTARY -- Who's the most important person to Wall Street this Election Day?

A. Al Gore;
B. George W. Bush;
C. Cisco CEO John Chambers.

If you answered "C," you would be right. Presidential debates, scandals and talk of various entitlements that won't materialize may keep the cable news channels humming, but Cisco (Nasdaq: CSCO) shares will have a much bigger impact on your 401(k). For many investors, Cisco shares are the Social Security plan.

Cisco's clout put CEO John Chambers in an awkward position after the Internet infrastructure giant reported its fiscal first quarter earnings. With worries about telecommunications capital expenditures percolating, Chambers had to acknowledge spending worries while talking up Cisco's growth.

Since Cisco has become a proxy for the Nasdaq, you could say there was a modicum of pressure here. Some traders will say that Cisco's conference call was good, but not good enough. In any case, Cisco's outlook was pretty damn good.

Chambers issued Cisco's typical platform for investors and topped it off with bullish guidance for fiscal 2001. Here's the platform that has investors loving Cisco: The company will move at Internet speed, take advantage of missteps by the competition, maintain "healthy paranoia" and execute well.

And more importantly Chambers and CFO Larry Carter delivered guidance that should have long-term investors cheering. Revenue will be up in the high single digit to low double digits sequentially. That's saying something considering Cisco reported first quarter sales of $6.52 billion, up 66 percent from a year ago.

For the year, Cisco said it sees 2001 revenue up 50 percent to 60 percent from 2000. Earnings per share for fiscal 2001 will be 2 cents a share to 5 cents a share above current projections. Analysts expect 2001 earnings to come in between 71 cents a share to 81 cents a share.

Chambers, like any good candidate, distanced his company from the competition. The bottom line? Cisco sees itself in a great position to take advantage of its competitors' execution problems and product gaps. Simply put, Chambers was talking a little trash. Lucent (NYSE: LU) booted its CEO and missed many quarters. Nortel (NYSE: NT), which just issued specific guidance, has investors spooked about slowing sales growth.

Chambers has been "pleasantly surprised" by struggles of competitors. These glitches will "provide breakaway opportunities" for Cisco, he added.

According to Chambers, Cisco is melding its dominance in the enterprise market into the service provider sector. Cisco is trailing Lucent and Nortel in the service provider space, but closing the gap quickly. As for the slowdown in telco equipment spending, Chambers did note that broadband access equipment growth was slowing, but noted Cisco could handle the adjustments.

Chambers handled the telco spending question and made it sound no different than Asia's problems a few years ago. Sure, orders from telcos grew less than 10 percent in the first quarter, but Cisco is expecting a quick rebound to double-digit growth. In other words, Cisco is confident it can execute around the potholes because it is better diversified and spending on Internet protocol will still grow substantially.

"Cisco has never been in a better position to gain share from market transitions and inflection points," said Chambers.

And given Cisco's history of delivering, Chambers has to get your vote.

Picky, picky

Since investors everywhere wanted to know about Cisco's outlook, there was too much reading between the lines. You'll hear dozens of interpretations of Cisco's first quarter.

Here's what some bears will say:

  • Slowing broadband access sales was mentioned in passing. For some, this will be viewed as cause for concern.

  • Inventory was up a bunch as Cisco braced for component shortages. Management noted the jump wasn't significant in the long run.

  • Concerns lingered around Cisco Capital, which loans money to customers to buy Cisco gear. Since Lucent has been strapped with bad loans and some carriers can't pay the bills, Cisco Capital was getting more attention than usual. Officials said Cisco had the reserves to cover bad loans, but a third of the loans fall in the "structured" category. Structured loans go to competitive local exchange carriers (CLECs) -- the stocks that are imploding daily.TDAIN


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