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Cisco's Ready to Take a Fall

Scott Moritz

Through thick and thin, CEO John Chambers has insisted the networking giant will continue to grow 30% to 50% annually over the long term. But don't be surprised if the curtain comes down on the era of smug certainty Tuesday afternoon, when Cisco is due to report fiscal fourth-quarter earnings.

Sure, Cisco will hit its numbers, as it nearly always does: Expect fourth-quarter earnings to match the 2 cent Wall Street consensus. But there's a growing sense on the Street that after a year's worth of writedowns, losses and even layoffs, Chambers may be ready to ratchet down expectations a bit.

No other company, mind you, has demonstrated such unshakeable optimism in the face of adversity. Cisco, as you'll recall, brilliantly built up a $4.1 billion stockpile of inventory on the eve of an industrywide spending collapse, then took a record $2.5 billion charge to reduce the balance-sheet value of those excess parts.

But did Cisco grovel at the feet of investors? No. While the rest of the tech field is awash in apologies and capitulation, Cisco has held firmly to its this-too-will-pass outlook.

Let's forget for a moment that investors lost $319 billion over the past year as Cisco shares plunged 69%. Let's ignore that year-over-year sales growth is expected to slow to 18% for 2001 from 55% last year, and that 2002 is expected to show a 16% sales decline. These facts are merely a part of the equipment-spending slowdown that Chambers once described as the equivalent of a 100-year flood.

Of course, the past year's pratfalls have sobered investors who at this time a year ago were eager to overlook any possible flies in the Cisco ointment. Wall Street analysts are already discounting Chambers' bullishness, putting their growth expectations in the mid-20% range. And the executive's own comments have increasingly been qualified with caveats like "in countries with good economies."

John Chambers can't hold on to a bubble-market dream forever. Wall Street's already thrown in the towel on Cisco's glorious past; maybe it's time Chambers did as well.