All eyes on Cisco earnings

All eyes are on the network equipment maker as investors look to Cisco's upcoming financial results to gauge the health of the tech economy.

4 min read
Investors are keeping a close eye on Cisco Systems this week, using the networking equipment maker's financial results to gauge the overall health of the technology market.

Analysts expect the networking leader will meet or just exceed second-quarter estimates of 19 cents per share, according to First Call. Yet signs that the economy is slowing has prompted analysts to warn that Cisco could face slower growth in the next quarter, and possibly beyond.

Cisco's status in the networking world makes it an obvious bellwether for the technology industry. It has remained the largest maker of networking equipment for businesses and telecommunications carriers--despite increasing competition from Lucent Technologies, Nortel Networks, and the gradual encroachment of emerging companies such as Juniper Networks, Sycamore Networks and Redback Networks.

For a short while, Cisco leapfrogged over Microsoft and General Electric as the most valuable company in the world, in terms of market capitalization. However, this status has since been diminished by a volatile stock market.

Ahead of the earnings report, scheduled after the bell on Tuesday, shares fell 81 cents to $34.69. Cisco stock hit a low of $31.93 at the beginning of this year.

Despite the leader's current troubles, investors and Wall Street analysts will no doubt scrutinize the networking leader's results and its financial predictions for the rest of the year.

"Because of its size and positioning, Cisco will give investors the most up-to-date check on what's going on in the economy," C.E. Unterberg, Towbin analyst Martin Pyykkonen said.

"Dell, Compaq and Microsoft and other major stocks reflect the PC markets. But Cisco stands out because they are focused on networking equipment, an area where spending has been great."

The network equipment market has not been immune to the slowdown in the economy. Slowing spending by the telecommunications service providers has prompted 3Com, Lucent Technologies and Foundry Networks--all Cisco rivals--to announce profit warnings last month.

Cisco Chief Executive John Chambers warned during two separate occasions in January that the company's second quarter, as well as the second half of the fiscal year, proved more challenging than expected because of slower sales.

Some analyst groups, such as Salomon Smith Barney, have revised Cisco's second-quarter revenue based on such comments. They now see the company reporting revenue of $6.9 billion, a 60 percent increase from the same quarter last year. That number is down from the previous prediction of $7 billion in revenue, or a 63 percent increase.

Analysts believe the company will make its numbers because of cost cutting, such as partial hiring freezes during the quarter.

"They'll probably come in at 19 cents and not a penny above, as they usually do," Pyykkonen said.

Analysts and investors will closely listen to company guidance for the rest of the year. Executives are expected to be more cautious with their financial predictions for the third quarter and rest of the calendar year.

Because of the financial uncertainties, analysts expect Cisco executives will give a wide range of financial estimates for its forthcoming quarters.

Because of the slowing economy, analysts are expecting flat or smaller-than-expected sequential revenue growth for the third quarter--and some have already reduced their earnings estimates for the rest of the year.

Thomas Weisel Partners, for example, recently reduced its 2001 fiscal year estimates for Cisco, from $29.9 billion in revenue and earnings of 77 cents per share to $28.5 billion in revenue to earnings of 74 cents per share.

For the third quarter, Lehman Brothers analyst Tim Luke reduced Cisco's expected sequential revenue growth from 6 percent to 3 percent.

"Our reduction in estimates is a result of continued worsening macroeconomic conditions and does not reflect an incremental loss of market share in any respective product line by Cisco," Mark Edelen of Thomas Weisel Partners said in a report.

But analyst B. Alexander Henderson of Salomon Smith Barney expects the company can still meet the company's previous guidance of earnings of 77 cents per share.

"We still expect them to hit numbers, but it's going to be close," Henderson wrote in a report. "We expect Cisco to make cautious comments due to weakness in December and January, but to maintain the full year? guidance, but with a shift from revenue growth to cost cutting."

Analysts say Cisco is better positioned to weather a downturn in the economy than most companies. Unlike some of Cisco's rivals, analysts said Cisco is equally strong in sales of equipment to both service providers and corporations, better protecting it from potential cutbacks in service provider spending in the next year.

"We believe that given the breadth of its product line, the strength of its customer relationships, and agility in implementing its strategy, Cisco is well equipped to endure adverse economic conditions," Henderson said. "Although far from being immune to economic exposure, we believe Cisco is likely to produce more robust results than most other companies in this space if the economy does slow precipitously."