Cisco Spark Can't Ignite Soggy Tech

The sector stays flat as investors focus on the company's modestly improved guidance.
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The Cisco (CSCO) - Get Report party rolled on after last evening's earnings bash, but the celebratory mood wasn't bubbling over.

The master of ceremonies, CEO John Chambers, was positively flush with good tidings Wednesday evening, noting a surge in first-quarter sales and a rash of optimistic remarks from customers. Cisco investors reveled, sustaining the stock's aftermarket gains in a heavy-trading Thursday session that left Cisco up about 4% just after midday.

But Chambers' giddy tone didn't match his somber forecasts. And notably, investors in other tech stocks weren't exactly throwing confetti on Thursday, as the Nasdaq moved just a few points higher. So it seems that doubts about the San Jose, Calif.-based networking giant's second-quarter forecast -- Cisco projected a 2% sequential revenue gain, when Wall Street had hoped for 4% growth off a lower first-quarter base -- were taking some of the air out of Wednesday's long-awaited sales blowout.

"I was surprised to see 2% guidance -- I'm fairly positive it will be higher than that," says Osborne Partners money manager Justin McNichols, who owns Cisco. "They're keeping expectations tempered so they are beatable."

Indeed, bulls say Chambers is merely being prudent with his guidance. And anyone who has followed the past three years of Cisco earnings calls would think Chambers may have learned a little lesson about managing expectations after being

dead wrong in the past. So fans say Chambers is simply setting up an easy target.

But not all Cisco watchers are so confident, and some remain concerned about a weak growth prediction for a quarter that is typically among the company's strongest. Adding to the worries was Cisco's order rate, which fell in comparison to billings. This so-called book-to-bill ratio is often considered a window on the pace of sales. With Cisco's book-to-bill below 1, some see a slowdown afoot.

One source of Cisco's recent growth has been strong sales to the federal government, an area that has

held up while other customers pulled back. But Cisco says federal spending is likely to drop in the second quarter due to seasonal buying cycles, and investors worry that the "fragile" recovery of big business customers won't happen fast enough to offset Uncle Sam's pullback.

After a strong opening, Cisco shares fell some 35 cents off Thursday's high, remaining up 4% at $22.79 in midday trading.

Perhaps the biggest caveat in the Cisco earnings aftermath can be found looking at the ticker tape rather than the company's income statement. Despite Chambers' claim that the tech spending recovery "appears to be slowly gaining momentum," the market merely shrugged Thursday.

The Nasdaq telecom index fell nearly 1%, and Cisco rivals such as

Juniper

(JNPR) - Get Report

and

Ciena

(CIEN) - Get Report

-- the natural beneficiaries of any broad-based pickup in information technology spending -- actually lost ground, declining fractionally in midday action.

In the past, sentiments like that from aspiring global economist Chambers would have sparked a massive rally among tech stocks.

"Cisco used to pull up the market, but this time it isn't," says one Connecticut money manager with no positions. He counsels that with the stock having nearly doubled over the last year, it would probably be wise to sell some Cisco holdings at this point.

Though Osborne Partners' McNichols isn't inclined to sell, he says he wouldn't necessarily be a buyer either, given that the stock trades at a lofty 30 times projected 2004 earnings. And McNichols also says that the timing of Nasdaq's recent run may have taken the steam out of the usual Cisco effect.

Still, the party rolls on.