Growth Talk Falls Flat at Cisco

Updated from May 6

Cisco's ( CSCO) John Chambers keeps trying to manage expectations, but Wall Street tends to be an unruly bunch.

Reinforcing nuance to the point of obviousness, the Cisco CEO emphasized that there has been progress in the struggle to return to consistent sales growth. Keeping his noted cheeriness mostly bottled up, Chambers sought to sell investors Tuesday night on a modestly bullish view of the rest of the year.

Impressively, he pursued this goal by noting the "slight upward bias" in the company's fourth-quarter forecast -- one that, as expected, calls for sales to stay flat with third-quarter levels.

For his part, Chambers pointed out that there's a world of difference between flat sales and the past three quarters of sliding sales. But the exec's mixed if upbeat-sounding message wasn't quite the tonic that growth-starved tech investors were looking for, even if it did come after the company posted solid third-quarter results. On Wednesday morning, Cisco slid 37 cents to $15.53.

Caution

Going into Tuesday's earnings, some investors had convinced themselves that the San Jose, Calif., networking king would raise guidance for the fourth quarter.

On the earnings call, Chambers emphasized that he is now "a little more cautiously optimistic" in his outlook for the fourth quarter. He predicted a slight increase in orders, which signals a possible return of a healthy bookings to shipments ratio or book-to-bill, which has been anemic in the past few quarters.

On the other hand, Chambers has been known to be generous in his assessment of the company's prospects in the past. Moreover, Cisco's own data don't appear to whole-heartedly support the bullish view: The company said Tuesday that its book-to-bill ratio remained below 1 for the third quarter. And Chambers himself predicted fourth-quarter profits of 13 cents a share, a penny shy of what Wall Street projects.

While sales dropped in Asia in the latest quarter, an emerging worldwide health scare wasn't at fault, the executive said. "SARS wasn't a factor and won't be a big business issue," said Chambers.

It all adds up to more of the same muddle that has confronted investors since the tech-and-telecom boom came to an abrupt halt in the summer of 2000. Despite continued progress in cutting costs, managing cash and buying back stock, Cisco remains hard-pressed to generate sales growth in a highly competitive market whose pursestrings are being held by penny-pinching big phone companies and corporate IT departments.

In-Line Skating

Of course, the news isn't all bad by any means, either. Cisco continues to sit on a commanding competitive position stocked with billions of dollars in cash. And if growth remains elusive, the company continues to be strongly profitable.

For the fiscal third quarter ended April 26, the networking giant posted earnings of $987 million, or 14 cents a share, on revenue of $4.62 billion. The figures were in line with Wall Street estimates. A year ago the company posted an 11-cent operating profit on sales of $4.82 billion.

"As we navigate through these challenging market transitions, we are particularly pleased with our solid financial and operational performance during the quarter," Chambers said in the earnings release. "By focusing on managing our business and making strategic investments in R&D and advanced technology markets, we are positioning ourselves for growth as the economy recovers, whenever that may be."

Cisco said the latest quarter's gross margin rose to 70.8% from 70.4% in the second quarter, reflecting the company's focus on controlling costs by squeezing suppliers.

Pay Me Now...

Still, there are plenty of questions surrounding the tech sector nowadays, what with the market having risen some 15% since the now-completed Iraq war began at the end of March. One of those questions deals with how real profits are at companies like Cisco, considering how many shares some tech firms dole out to execs and other workers.

During the conference call, Chambers made an impassioned pitch for employee stock options. According to Chambers, employee stock ownership keeps critical tech jobs in the U.S. Chambers seemed to be speaking to lawmakers as much as shareholders as he lobbied for no major policy changes on stock options.

Cisco itself has been pursuing a heavy stock-buyback policy to eliminate the dilutive effect of those options and return some of its huge cash hoard to shareholders. The company said it repurchased $2 billion worth of stock in the third quarter and plans to reduce its share count slightly in the fourth quarter through share buybacks. The company has given itself more than $8 billion worth of buyback authority in an effort to shrink its massive share count and put cash to work.

The company also officially established Dennis Powell as the new CFO. His predecessor, Larry Carter, will retire this month as planned.

More from Technology

Worries About a Trade War Could Throw Wrench Into the Tech Stock Rally

Worries About a Trade War Could Throw Wrench Into the Tech Stock Rally

5 Stock Picks Under $10 for Millennials

5 Stock Picks Under $10 for Millennials

3 Apps Than Make Retirement Planning Fun for Millennials

3 Apps Than Make Retirement Planning Fun for Millennials

Decision on AT&T's Merger With Time Warner Marks a Monumental Week for M&A

Decision on AT&T's Merger With Time Warner Marks a Monumental Week for M&A

3 Things Amazon Still Hasn't Figured Out At Whole Foods 1 Year In

3 Things Amazon Still Hasn't Figured Out At Whole Foods 1 Year In