Remember the good old days, when Cisco Systems could lift the market with a wave of its magic wand? CEO John Chambers would unveil the company's quarterly results, complete with the obligatory beating of Wall Street profit estimates by one or two pennies, and investors would cheer with gratitude. Late on Wednesday, the networking giant said that it beat profit estimates as usual — but that wasn't what caught the market's eye. The problem was the glimpse into the future that Cisco provided.
Sure, the company said it made a profit of $1-billion (U.S.) or 14 cents a share in the most recent quarter, a performance that was — surprise! — a penny better than the consensus estimate from Thomson Financial/First Call. And even after excluding one-time items, Cisco's profit of $618-million or 8 cents a share was substantially better than the loss of $268-million of 4 cents the company had in the same quarter last year.
In other good news, Cisco's revenue was also up 9 per cent compared with last year's quarter, and its profit margins were higher too. So what's wrong with this rosy picture? Only that Mr. Chambers didn't seem very optimistic about the next quarter producing the same kind of results, or even the quarter after that. And for a market that has been searching for the bottom for more than a year now, that's a big downer, since Cisco is one of the bellwethers that investors look to for leadership.
After a quarter in which revenue was more or less flat over the prior one, Cisco said the current quarter would see more of the same, or perhaps even a sales falloff of 3 per cent or 4 per cent. By this point — when some market watchers seem convinced that the turnaround has finally begun — flat revenue is bad enough; lower revenue is definitely not a good sign. Cisco also said that its profit margins could be lower.
Cisco's ability to survive and maintain its market share isn't really the issue. The company has enough of a stranglehold on the corporate networking business, and a clean enough balance sheet, that it doesn't have to worry about going through the kind of upheaval that Nortel and Lucent are. At the same time, however, growth is what investors are looking for, and at the moment there is precious little of it.
Things were so much brighter back in May, when Cisco's quarterly report came in and almost singlehandedly pushed the Dow Jones average up by 300 points or so, its largest gain in months, while the Nasdaq soared by 122 points or almost 8 per cent. In case you're keeping track, that put the tech-heavy index up around the 1,700 mark, or about 300 points higher than it is now — even after the runup over the past month.
What's interesting about the rally Cisco's results sparked in May is that they weren't really that much better than the quarter it just reported. In the quarter it reported in May, revenue came in a little shy of most Wall Street estimates, but higher profit margins allowed the company to report a profit (before one-time items) that was 2 cents better than expected. This time, the revenue met estimates and the profit beat by a penny, but both the Nasdaq index and Cisco's share price tumbled.
In fact, the company's stock is about 30 per cent below where it was when it released that blockbuster May report — and that's despite a substantial rise from its recent low of about $8. The problem the market is trying to wrap its head around is when the company will actually start to experience some growth again. In May, the corner seemed to be all but turned, but almost six months later it is still not in sight.
Investors got another kick at the rally can when Cisco reported its results for the quarter ended in July. The company beat Wall Street earnings estimates by 2 cents then too, thanks to high profit margins, although its revenue was also a little weaker than expected. Cisco also said that orders for networking equipment were higher than it had forecast, which helped push up the tech sector. The company warned that this order boost likely wouldn't continue, but the market wasn't listening.
Both of the previous rallies it sparked quickly fizzled, and Cisco's stock has tumbled. And yet, after a runup of more than 50 per cent in the past month, its share price still works out to more than 35 times its earnings per share for the past 12 months, and almost 5 times its revenue. That might not seem like much compared with the networking giant's historical averages, but it's a lot to ask for a company whose sales are likely to either stay flat or possibly even continue to fall.
E-mail Mathew Ingram at mingram@globeandmail.ca
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