Cisco Returns to Cautious Stance

Not every number looked good to Cisco investors. The fiscal first quarter is seasonally weak, Chambers said, and seasonal effects are the primary reasons for the cautious guidance.

Asked about the nature of the cautious outlook among business customers, Chambers said it was "purely from what I'm hearing from CEOs," who are seeing momentum for more modest growth.

There were other soft spots as well. The company's cash flow of $2.1 billion barely exceeded its quarterly stock buyback cost of $2 billion. And inventories continued to rise faster than sales.

The company said quarter-end inventory hit $1.21 billion, up $86 million, or 7.7%, from the third quarter. Sales rose around 5% over the same period. Any time inventories rise faster than sales, investors take note because the disconnect could signal that the current rate of sales growth isn't sustainable.

Inventory turns were 6.4 in the latest quarter, compared with year-ago 6.8 and 6.3 in the third quarter. The number signifies the number of times in the quarter Cisco clears its inventory. A larger number is better because it shows the company is using capital efficiently and not keeping huge quantities of goods on hand.

"We would expect to see a gradual increase in inventory turns as Cisco returns to more normalized inventory levels after its sharp build-up last quarter," says CIBC analyst Steve Kamman, who has a buy on the stock and whose firm doesn't do underwriting for Cisco. In the company's fiscal third quarter ended in April, Cisco reported a 20% jump in inventory.

The third quarter's large and puzzling increase didn't jibe with sales results. To pessimists, the stockpiling of parts brought back bad memories of three years ago, when Cisco sat atop a $2.5 billion mountain of surplus inventory after woefully misjudging product demand. But to bulls, higher inventory may simply be a preparation for higher sales volume.

Tuesday's news comes as big phone companies and corporate customers increasingly favor gear made by outfits like Cisco and rival Juniper (JNPR). The two companies make Internet routers that help businesses manage growing network traffic levels.

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