Cisco Tops Q3 Views As Sales Fall Hard; Is Bottom In Sight?

Tech bellwether Cisco Systems (CSCO) beat analysts' third-quarter estimates Wednesday after cutting costs amid sharply falling sales. But executives and others say they see early signs that customers are regaining their financial footing.

For the quarter that ended April 25, Cisco earned 30 cents per share, minus special charges, 21% below the year-ago quarter but 20% above the average estimate of analysts polled by Thomson Reuters. Sales fell 16.6% to $8.2 billion, slightly above views.

For the current quarter, CEO John Chambers expects sales to drop 17% to 20%, slightly better than the 20% drop analysts were predicting.

"For the first time in many quarters, many global customers are describing their business differently than in prior quarters," Chambers said. "They're seeing a stabilization and leveling out, and they're finally seeing something solid under their feet compared to recent quarters."



Shares jumped nearly 6% in late trading immediately after the earnings news but settled down at around 20, still near a seven-month high.

The San Jose, Calif., company is the market leader in computer networking equipment but has struggled with a steep sales slowdown in recent quarters as recession-hit customers slashed spending.

Cisco is the first major tech vendor to report results that include sales from April, results which analysts are watching closely for signs of a bottom in tech purchases.

Some analysts already see glimmers of a rebound in the networking sector, says Bill Choi of Jefferies & Co. He notes that shares have risen for Cisco rivals Brocade (BRCD), Juniper Networks (JNPR), F5 Networks (FFIV), Polycom (PLCM) and Riverbed Technology (RVBD) this year. Choi rates Cisco stock as a buy.

"People are feeling more comfortable about the stabilization that's going on out there," Choi said. "But a lot depends on the economy, so there is still a lot of nervousness."

Simon Leopold of Morgan Keegan, who rates Cisco a buy, says analysts were tracking Cisco's revenue growth over the previous quarter for a signal that the worst was almost over.

That didn't happen. Sales fell nearly 10% from the second quarter. Cisco's business has "likely stabilized" in recent months but "visibility remains limited," according to Mark McKechnie of Broadpoint AmTech. He has a neutral rating on Cisco stock.

Late last year, Cisco announced a hiring freeze; it plans to cut $1 billion in travel and marketing expenses this fiscal year. The company has avoided broad-based layoffs so far. While Chambers didn't rule them out Wednesday, he says Cisco can probably avoid large-scale job cuts.

In February, Cisco forecast a sales decline of 15% to 20% for the recent third quarter. Yet Chambers also said Cisco should achieve longer-term sales-growth rates of 12% to 17%, assuming the economy makes a comeback in the next year or so.

The networking market appears to be in a midstage recovery, behind the tech services and software sectors but ahead of personal computers and and servers, says Mark Sue of RBC Capital Markets.

"Barring any shocks to the system, we think technology spending will show a rolling recovery for the balance of the year and into 2010," Sue wrote in a research note. He rates Cisco stock as outperform or buy.

In March, Cisco entered the highly competitive market for server computers that power corporate data centers. Cisco's first server product, the Unified Computing System, poses a direct challenge to longtime Cisco partners Hewlett-Packard (HPQ) and IBM (IBM).

At the same time, HP has stepped up efforts to compete against Cisco in network switches and software.

Meanwhile, Oracle (ORCL) may enter the server market with its planned acquisition of Sun Microsystems (JAVA).

Cisco's entrance to the server market is "likely focusing important partners and resellers on other opportunities," said Avi Cohen of Avian Securities. He notes that IBM recently announced pacts with Brocade and Juniper.

"Juniper is having some success and making some inroads" in taking market share from Cisco, according to a research note from Cohen. Last month, Juniper said it was seeing more stability in the networking market.

Cisco is also expanding its focus on consumer networks for the home. To that end, the company plans to close its $590 million acquisition of Pure Digital, the maker of Flip Video mini-camcorders, in the current quarter.

Despite the recession, Chambers says Cisco will continue to take a long-term view.

"Our vision does not vary dramatically by month, by quarter or even by year," he said. "Our views do not tend to change every month or every quarter."

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