With Cisco Systems set to announce its 2Q02 earnings on Wednesday, many industry-watchers anticipate a positive report, despite the layoffs, falling stock prices, cost-cutting measures and company-wide reorganization that marked the last calendar year.
But don’t jump to the conclusion the telecommunications industry slump is over.
Analysts attribute this step forward to Cisco’s strength as the enterprise market’s leading supplier, and a good earnings report would not necessarily indicative of an immediate upswing in the tech and telecom industries.
ABN-AMRO predicts that Cisco’s 2Q02 earnings would “be cautious but positive,” with $4.6 billion in revenues and earnings per share of five cents or possibly six cents. That would be an improvement from last quarter’s revenue of $4.4 billion and EPS of four cents. Its recent earnings preview chose Cisco as its top global pick, saying, “We believe that its breakaway strategy will begin to gain momentum in 2002.”
Merrill Lynch is also predicting an EPS of five cents, but is expecting revenues of $4.5 billion, up two percent sequentially but down 33 percent year-to-year. The January 30 report states that while a year-to-year comparison “still shows difficult business results, Cisco may be past the bottom,” forecasting that the April quarter will show positive year-to-year growth.
While declining to comment on the details of the earnings announcement, Joe Freddoso of Cisco’s RTP campus did say, “For the last couple of quarters we have been successful at picking up market share. Combine that with the cash position of this company and it shows a positiveness in a down economy. … These are signs of an efficient company that has adapted well to the economy.”
Positive but conservative in expectations
Forrester Research senior analyst Maribel Dolinov takes a conservative viewpoint on Cisco’s earnings announcement, based on activities in the telecom and technology sectors in general.
“Growth rates are going to be slow. It looks as if the outlook [in the industry] will be slow for up to a year,” he says. “I’m not expecting to hear anything amazing.”
On the other hand, Dolinov says that Cisco’s numbers will most likely be better than the telecom industry at large, because of its strong enterprise business.
Zeus Karravala, Vice President at The Yankee Group, agrees that Cisco’s enterprise customers are one of its strengths right now. “I expect there to be some optimism in Cisco’s announcement. It is the largest enterprise equipment manufacturer. That business has really held Cisco up,” he says. “I expect Cisco’s earnings will be fine, although they will still be a big drop from a year ago.”
Cisco is seeing stable to increasing business from its enterprise customers and declining business from carriers according to Merrill Lynch’s report; Cisco’s core business…enterprise data-networking…is giving all signs of recovery.
Good news on Wednesday could be the continuation of an upward swing that began last quarter. In the last year, Cisco’s stock price has ranged from a high of $40 per share to a low of $11 per share. Most recently, it has hovered around the $19 mark.
For Cisco’s RTP staffers, meeting or exceeding expectations would not be the only measure of a turnaround. Of Cisco’s top three products in terms of growth in the last year according to ABN-AMRO, two … the cable business and enterprise voice and video … have a presence at the RTP location. In addition, RTP houses the research and development center for voice enablement of all Cisco’s platforms, as well as the mobile wireless and the core of the VOIP (Voice Over Internet Protocol) businesses.
April is the seasonally weak period for Cisco but ABN-AMRO still expects four to four and-a-half percent sequential revenue growth, stating confidence in both enterprise customers and small to medium companies increasing future corporate IT spending.
Strength in enterprise market could be key for Cisco
In the next quarter, Cisco’s strength will continue to be that it is the leading provider and has follow-on business from enterprises that are already customers, according to Dolinov. She doesn’t believe new equipment sales will thrive for any company in the coming year. “I don’t see any big wins from the service provider side, nor do I see any compelling reason for enterprises to buy new routing switches and other equipment,” she explains.
Karravala agrees Cisco still has challenging times ahead. “The telecom industry is still suffering quite a bit; I don’t suspect it has recovered much, but enterprise is strong,” he says. “Cisco’s strength will remain being the largest supplier of enterprise equipment . With no immediate signs of the telecom industry recovering, they’ll want to focus their energy there. Cisco likes to think the worst is in the past. We are not predicting a tech recovery until we see consecutive quarters of growth.”
However, based on Cisco’s business, it appears that recovery will come in the enterprise arena before the telecom sector. “If Cisco’s outlook is cautious but positive, then it is in line with what we are seeing in the telecom industry,” says Tim Smith, Vice President-Chief Analyst at Gartner Group.
Merrill Lynch’s report, however, views Cisco as a solid and stable investment, saying the stock “remains one of our favorite picks. With the enterprise showing sings of improvement, we think that Cisco is a dependable way to play the recovery given its broad product breadth and strong balance sheet.”