Cisco Switches Horses

The longtime estimate-topper now urges analysts to look at other measures. The stock slides.
Author:
Publish date:

Updated from 4:46 p.m. EDT

Cisco Systems

(CSCO) - Get Report

sank late Tuesday after the big networker met fourth-quarter estimates but flummoxed investors with some hard-to-read body language on its guidance.

The San Jose, Calif., communications equipment company also scotched rumors of a linkup with handset titan

Nokia

(NOK) - Get Report

, saying the Helsinki-based company is "outside our strategy and outside our thinking process."

After spending most of Tuesday's postclose session unchanged, Cisco shares slipped 3% in late trading.

For the quarter ended July 30, the San Jose, Calif., maker of networking gear earned $1.54 billion, or 24 cents a share, up from the year-ago $1.38 billion, or 20 cents a share. On a pro forma basis, excluding certain costs, latest-quarter earnings were 25 cents a share.

Revenue rose 11% from a year ago to $6.58 billion. The second-quarter numbers were in line with Wall Street's expectations. Analysts surveyed by Reuters Research had forecast a 25-cent pro forma profit on sales of $6.56 billion.

Cisco's fourth-quarter results "seem very positive, particularly for the advanced technology group," says Heavy Reading analyst Scott Clavenna. In a similar vein, a New York money manager with no positions said he didn't see any blemishes on the report. "They came in 100% in line. The gross margins were better, deferred revenue went up 4.5%, inventory was flat ... it looks fine," the money manager said.

Guidance for coming periods seemed pretty much in line as well. Cisco expects sales in the current quarter ending in October to be flat to down sequentially but about 10% above year-ago levels. On gross margins, the company plans to stay in the 67% range. Those figures put Cisco broadly in line with the Wall Street consensus, which calls for another 25-cent profit in the first quarter on $6.63 billion in revenue.

But Cisco then shook up Wall Street with a shift in focus. In something of a reversal, the company now wants to de-emphasize its quarterly bottom line -- quite a claim for a company that has a practically unrivaled track record of beating per-share earnings estimates by a penny quarter after quarter.

Finance chief Dennis Powell even chastised analysts for continually pegging their estimates above the company's own guidance. "We urge analysts to be conservative" with their forecasting models, Powell said.

Now that it's keeping heavier inventories to help reduce order-to-shipment times, Cisco executives say quarterly results are far more subject to seasonal fluctuations in demand. As a result, Chambers and Powell hoped analysts would start comparing the company's numbers on a year-over-year basis, rather than sequentially, to better gauge the performance. Cisco says it will now consistently provide order growth rates along with sales growth so analysts can try to judge business momentum.

If Cisco thought the shift would be easy, it was wrong. "I'm so confused by all that explanation it's not even funny," said one analyst.

Cisco said it spent $2.5 billion on stock buybacks during the quarter at an average price of $19.14 a share. Cisco says it has now spent a total of $19.3 billion on share buybacks since 2001, cutting its outstanding share count by 13.4%. This decrease includes stock options and shares issued for acquisitions. The company has $16 billion in cash on hand.

Cisco said its book-to-bill ratio for the quarter, measuring the value of orders coming in against the products being shipped, was above 1, a modestly bullish sign.

Cisco reported a relatively even balance of demand for networking gear across its global markets, with the exception of Japan. "We continue to see some challenges" in Japan, Chambers told analysts on the conference call. Japan represents about 5% of revenue. Orders in Japan are down both sequentially and year over year, Cisco says.

Cisco's latest quarterly update comes after rumors swirled briefly about a potential megadeal between the computer networking shop and Nokia, the world leader in cell phones. The speculation began after U.K. paper

The Sunday Business

reported this weekend that the two companies were in talks.

Nokia has denied the story, and until Chambers' remarks late Tuesday Cisco had been mum. Analysts dismissed the idea, largely because Nokia's consumer handset focus is far outside Cisco's usual practice of niche tech acquisitions. But investors seemed mildly intrigued by the speculation, sending shares in both companies higher Monday and Tuesday.

On the Nokia merger rumor, Chambers expressed surprise that the speculation got such strong play. While he never said the company wouldn't buy Nokia, Chambers made it clear that Cisco isn't interested in a big acquisition "halfway around the world."

Late Tuesday, Cisco shares fell 61 cents to $19.