Good Earnings for Cisco Would Be Good News for Volatile Networkers

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Cisco

(CSCO) - Get Report

, whose durable run on Wall Street has outlasted such tech bellwethers as

Oracle

(ORCL) - Get Report

and

Intel

(INTC) - Get Report

, might restore some stability to the turbulent technology sector with its earnings report, planned for Tuesday after the close.

"They had the quarter in the bag," says research director Eric Linser at

Rosenblum Silverman Sutton

, a money management firm.

At the same time, Cisco's report will paint a clearer picture about the growth prospects for the volatile networking sector as a whole. "The whole pulse of the industry is really based on Cisco," Linser says.

It's not hard to see why investors like Cisco so much. The company hasn't missed Wall Street's official profit estimates in recent memory. Its competitors weakened in 1997, due to mergers, sour acquisitions and product glitches. Already dominant in many segments, Cisco is plowing into the backyards of

Ascend

(ASND) - Get Report

and

Newbridge Networks

(NN)

. Cisco's $63.5 billion market cap dwarfs its rivals.

However, taking the pulse has grown more difficult. Cisco and other networkers cannot predict revenue as well as in the past, according to one money manager who owns Cisco shares. He says customers are buying its products with less lead time, which shrinks the order backlog and makes quarterly predictions more hazardous.

Cisco's report will have plenty of broader implications as well:

Its earnings report could shine an even brighter spotlight on Newbridge, whose $4.6 billion market cap is quite small next to Cisco's. After a trading halt Monday afternoon, Newbridge warned that its profits in the January quarter would be 7 cents per diluted share, compared with the

First Call

consensus of 25 cents per share. The drastic shortfall stems from poor international sales of older "time-division multiplexing," or TDM products, an old technology for shipping data, voice and other signals.

Newbridge pointed out that its "asynchronous transfer mode," or ATM, products are still selling well. But that is the market where Cisco competes with increasing ferocity, meaning Cisco's earnings report could offer more clues about Newbridge's long-term hopes.

Cisco's push into this market was evident last week, when phone carrier

U S West

(USW)

said Cisco won a healthy piece of its business for building ATM switches for its wide-area network. Newbridge had been U S West's chief supplier.

Mike Pascoe, president of Newbridge's U.S. subsidiary, says it was Cisco's most significant win in this area. But he adds that Newbridge still expects to increase its business with U S West in 1998 from 1997.

So if Cisco's report shows that its ATM products for carriers are particularly strong, Linser says that investors might react by selling Newbridge.

Second, Cisco's report will give an indication of the overall growth of the networking industry. In early November, CEO John Chambers told analysts that industry revenue likely would grow an average 30% to 50% annually, with potential short-term deviations.

The report also could offer indications of the health of industry sales in North America and Europe. Recent softness in Asia makes this area more important than ever for these international suppliers.

"If the US and European markets were weaker

with corporate customers, that would be bad news," says the money manager invested in Cisco. About 65% of its bookings came from the U.S. last quarter.

It also will offer clues about Asia, especially Japan. Chambers said last quarter that Asian customers had fallen to 12% of its revenue from previous highs of 15% and had become the slowest-growth region in its portfolio. Japan made up more than half that Asia portion; Japan and Korea were areas of concern. Ascend said on Friday that Japan won't warm up until the second half of 1998, so investors will be sharply attuned to Cisco's take on the region.

As for Cisco itself, Linser at Rosenblum Silverman Sutton says that after having checked in with company sources, he figures that Cisco achieved 115% of its sales goal in the January quarter. That would give Cisco the option of booking all the sales in the period just ended, or saving some for the next quarter.

"I think they'll do a little of both," Linser says, and beat the

First Call

consensus estimate of 42 cents per diluted share by about two pennies. A year ago, the company reported 34 cents per diluted share, but that was before a 3-for-2 stock split that was effective Dec. 16. If somehow the share price falls, his firm likely will purchase additional Cisco stock for new client accounts.

On Monday, Cisco climbed 7/8 to 63 15/16. It trades at 55 times trailing earnings.