The Good and the Bad on Cisco's Beautiful Call

Cisco's(CSCO) rosy fiscal fourth-quarter picture hides a couple of thorns.

Cisco posted its highest year-over-year revenue-growth percentage, 61%, in four years, and the company told analysts Tuesday that growth over the next 12 months should continue in the neighborhood of 50%. These are very bullish sentiments for a company known more for tempering the Street's expectations than heightening them. (TSC reported on the earnings in an earlier piece.)

But then came the bad news. Executive vice president and CEO heir apparent Donald Listwin said he was leaving Cisco to run another company, which he will reveal Wednesday. Listwin served as CEO John Chambers' right-hand man and headed Cisco's service-provider business and marketing department.

Donald Listwin Executive VP is leaving.

The departure would be the most significant from Cisco's executive suites to date.

"The bad news is that Listwin is leaving. The good news is that Chambers is going to be with us for a while," says Edward Jones analyst Dave Powers, who has a hold rating on Cisco. Edward Jones has no banking ties to Cisco.

Cisco's deep management bench can certainly help it take the departure in stride, say analysts, but it did cloud an unusually bright picture.

"I don't anticipate any real impact from Listwin's move," says Chase H&Q analyst Erik Suppiger, who has a strong-buy rating on Cisco. Chase H&Q has no banking ties with the firm.

On other fronts, Cisco's gross margins eroded less than 1%, which is actually less than some expected. Cisco said new-products sales in new markets and a component shortage contributed to the margin erosion. And optical-equipment sales continue to be a much harder market to enter than some may have expected. Cisco said it will not have revenue from its Monterey optical cross-connect products this year.

"They are playing the game of catch-up, particularly to Nortel (NT) in the optic space, and they admit that," says Suppiger.

But sales in Cisco's core router business -- the equipment that connects computers together -- remained strong, not only across product lines but across regions. Cisco said it recorded a 7% sales gain in Japan, which represents a significant and potentially lucrative crack in a formerly uneager market.

Cisco's broad range of success was cheered repeatedly on a two-hour conference call Tuesday evening. Many analysts prefaced their questions with gushing praises to Cisco's executive team.

"They made $700 million more this quarter than last quarter. I can't imagine a company that's growing faster than Cisco in terms of dollars," says Suppiger.

But at least one analyst is cognizant of the risks investors face atop Cisco's $460.1 billion mountain of market capitalization.

Watch out below.

"Clearly they've had tremendous execution," says Powers of Edward Jones. "But one slip, and there would be a whole lot of downside for some time."

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