CSCO Conference Call not too optimistic
Revenues fell nearly the 30% from the Jan qtr that Cisco had anticipated, and the July quarter is still expected to be flat to down 10%. For FY02 (July), Cisco offered no useful guidance, saying only that the current range of analysts' estimates was probably wide enough -- but it's so wide as to offer no guidance at all.
Margins fell to 54.5%, consistent with guidance in the low-mid 50% area. Expect more of the same in the next couple of quarters before what Cisco hopes is a recovery next calendar year.
Inventories were $1.9 bln, which was above guidance of $1.6 bln, but that added amount was precisely offset by a smaller than indicated inventory writedown of $2.2 bln (guidance was $2.5 bln). Before anyone gets excited about the smaller writedown, note that Cisco itself downplayed this factor, saying that it had been very conservative with its initial estimate. There was no hint that the smaller writedown was due to expected improvement in sales.
THE BAD NEWS
Enterprise business, contrary to the optimistic forecasts of a pick-up heard recently, continues to weaken. Chambers said that many key industries, such as tech, financial, and manufacturing, remain "under pressure."
Service provider business is unimaginably bad. Chambers noted that in the alternative service provider market (where Cisco made its biggest inroads into the service provider business), orders fell from a quarterly pace of about $500 mln over the past year to roughly $125 mln in the April quarter. He thought that this business might have bottomed, though that forecast appeared to be based primarily on how close the number got to zero rather than any firm indications of improving demand.
Europe and Asia are following the US down. In the entire call, we heard mention of only two positive geographies: China and India. Chambers said that Europe had seen a "dramatic change since the February timeframe" and that Japan was down over 30%. Given that the US is still weakening, it's safe to say that the lagging regions -- Asia and Europe -- have further to fall.
Inventories are still bloated. Even after the $2.2 bln writedown, inventories were over $1.9 bln. For comparison purposes, note that inventories were just $878 mln in the year-ago period when revenues were at a comparable level. Further writedowns are not out of the question.
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It's all guessing at this point, and with Europe and Asia only recently joining the downturn and service providers unlikely to recover for a couple years, we see no catalysts to boost Cisco's stock. With a forward P/E of over 60, falling sales, rising inventories, and no visibility, there's not much to like here.
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