Is tech running a fever? Cisco earnings will tell

Summary:All eyes will be on Cisco Tuesday, using the networkingequipment maker's financial results to gauge the overall health of the technology market.

Investors are keeping a close eye on Cisco Systems this week, using the networking equipment maker's financial results to gauge the overall health of the technology market.

Cisco on Tuesday is expected to report a second-quarter profit of 19 cents per share, according to First Call estimates. But with the slowing economy, some analysts warn that the company faces slower revenue growth in the next quarter--and possibly beyond.

Because of Cisco's (csco) bellwether status in the industry, investors and Wall Street analysts will scrutinize the networking leader's results and its financial predictions for the rest of the year.

"Because of its size and positioning, Cisco will give investors the most up-to-date check on what's going on in the economy," C.E. Unterberg, Towbin analyst Martin Pyykkonen said.

"Dell, Compaq and Microsoft and other major stocks reflect the PC markets. But Cisco stands out because they are focused on networking equipment, an area where spending has been great."

Analysts expect the networking leader will meet or just barely exceed second-quarter expectations when the company announces its results after the market closes on Tuesday.

Shares fell in early trading Monday, down 81 cents to $34.69. Shares hit a low of $31.93 at the beginning of this year.

The network equipment market has not been immune to the slowdown in the economy. Because of a downturn in spending by telecommunications service providers, several Cisco rivals--3Com, Lucent Technologies and Foundry Networks--announced profit warnings last month.

On two separate occasions in January, Cisco Chief Executive John Chambers even warned that Cisco's second-quarter and the second half of the fiscal year were more challenging than expected because of slower sales to service providers.

As a result, some analyst firms, such as Salomon Smith Barney, revised Cisco's second-quarter revenue to $6.9 billion, a 60 percent increase from the same quarter last year. That number is down from the previous prediction of $7 billion in revenue, or a 63 percent increase.

Analysts believe the company will make its numbers because of cost-cutting, such as partial hiring freezes during the quarter.

"They'll probably come in at 19 cents and not a penny above, as they usually do," Pyykkonen said.

Predicting caution
Analysts and investors will closely watch what company executives have to say for the rest of the year. Analysts expect Cisco executives will be more cautious with their financial predictions for the fiscal third quarter and the rest of the calendar year. Because of the financial uncertainties, analysts expect Cisco executives will give a wide range of financial estimates for its forthcoming quarters.

Because of the slowing economy, analysts are expecting flat or smaller-than-expected sequential revenue growth for the third quarter--and some have already reduced their earnings estimates for the rest of the year.

Thomas Weisel Partners, for example, recently reduced its 2001 fiscal year estimates for Cisco, from $29.9 billion in revenue and earnings of 77 cents per share to $28.5 billion in revenue to earnings of 74 cents per share.

For the third quarter, Lehman Brothers analyst Tim Luke reduced Cisco's expected sequential revenue growth from 6 percent to 3 percent.

"Our reduction in estimates is a result of continued worsening macroeconomic conditions and does not reflect an incremental loss of market share in any respective product line by Cisco," Mark Edelen of Thomas Weisel Partners said in a report.

But analyst B. Alexander Henderson of Salomon Smith Barney expects the company can still meet the company's previous guidance of earnings of 77 cents per share.

"We still expect them to hit numbers, but it's going to be close," Henderson wrote in a report. "We expect Cisco to make cautious comments due to weakness in December and January, but to maintain the full year…guidance, but with a shift from revenue growth to cost-cutting."

Analysts say Cisco is better positioned to weather a downturn in the economy than most companies. Unlike some of Cisco's rivals, analysts said Cisco is equally strong in sales of equipment to both service providers and corporations, better protecting it from potential cutbacks in service provider spending in the next year.

"We believe that given the breadth of its product line, the strength of its customer relationships, and agility in implementing its strategy, Cisco is well equipped to endure adverse economic conditions," Henderson said. "Although far from being immune to economic exposure, we believe Cisco is likely to produce more robust results than most other companies in this space if the economy does slow precipitously."

Topics: Cisco

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