Cisco Sounds the Alarm
By Scott Moritz
Senior Writer
08/05/2003 04:56 PM EDT
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Updated from 4:31 p.m. EDT
Wall Streeters headed for the exits Tuesday after Cisco (CSCO:Nasdaq - commentary - research) delivered the bad news: The tech-spending doldrums aren't over.
In fact, going by Tuesday's postclose earnings report, demand for communications gear may be getting even softer. Yes, the San Jose, Calif., company posted fiscal fourth-quarter profits that were broadly in line with analyst estimates. But Cisco failed to pull off its requisite upside EPS surprise, and other data offered little support for the recovery story that investors have been banking on this summer.
For instance, CIBC World Markets analyst Steve Kamman noted a sharp rise in inventory, to $873 million in the latest quarter from $765 million in the fiscal third quarter. Meanwhile gross margin held steady at 70%, to the dismay of observers who had been hoping for a 71% read on that line. Amid the ominous tidings, Cisco shares dropped 7% in heavy postclose trading, leading an aftermarket selloff in tech shares.
The news comes as investors anxiously await word of Cisco's fiscal first-quarter outlook, pending in a postclose conference call. Wall Street views the gearmaker as a bellwether for a long-awaited upturn in corporate information technology spending. But even before the fourth quarter's mixed numbers, few observers were holding out hope for anything but a flattish first-quarter projection.
For the fourth quarter ended July 27, Cisco reported earnings of $982 million, or 14 cents a share, on revenue of $4.7 billion. A year ago the company earned $772 million, or 10 cents a share, on sales of $4.8 billion. On a pro forma basis, excluding certain costs, latest-quarter earnings were 15 cents a share.
Analysts surveyed by Thomson First Call had forecast fourth-quarter earnings of 15 cents a share on revenue of $4.7 billion. But investors have grown accustomed to Cisco beating its target by a penny, and the company's failure to do so Tuesday sent its stock down $1 in postclose action to $17.86.
The stock has surged in recent weeks to a 52-week high as investors have begun wagering that the company will be among the first to benefit from any growth in the economy. Whether Cisco's rally, and the techwide surge that surrounded it, will be intact when trading resumes Wednesday now appears to be the key question.
