Cisco's Down, and So Is Tech

Investors fear that the gearmaker's bearish forecast in the current quarter is a harbinger of slower tech growth overall

Cisco CEO John Chambers. Justin Sullivan/Getty Images

by Aaron Ricadela

Three months ago, Cisco Systems (CSCO) Chief Executive John Chambers sparked a sell-off in technology stocks when he highlighted soft spending by U.S. companies. The comments left investors asking whether the decline would persist. On Feb. 6, they got their answer.

During a conference call with analysts, Chambers said Cisco's revenue would rise a mere 10% in the quarter that ends in April. That's short of the 15% growth Wall Street had expected. Investors, who hang on Chambers' every pronouncement as a gauge of computer industry health, took the remarks as a sign that U.S. companies are cutting back on tech spending. Yet they weren't assuaged by his assurances that the slump would be short-lived. In extended trading, Cisco stock tumbled, dragging down shares of other marquee tech-sector names.

The bearish forecast, which equates to a $450 million shortfall, overshadowed a fiscal second-quarter report showing a 7.2% increase in profit and 16.5% gain in sales, in line with analysts' estimates. It left investors with a bleak picture of U.S. corporate spending on a broad range of computer products. "We are at the front end of an economic slowdown [and Cisco] is the lead car in the whole chain," says Samuel Wilson, a senior analyst at JMP Securities (JMP). "It's another confirmation of a continuing stream of data points we've gotten in the past two months that business is decelerating."

Sharp Decline in January Sales

Sales of communications equipment are off, retailers and automakers have dialed back spending, and there's a better-than-even chance Cisco's core telecom and cable-TV customers will slow their spending by mid-year, Wilson says. In light of the new forecast, owning Cisco shares won't let investors outperform the Nasdaq composite index, he adds. "My outlook for the stock is pessimistic."

Cisco shares fell $1.95, or 8.5% in after-hours trading, after shedding 18 cents to close at $23.08 during regular trading on Feb. 6. Investors sold shares of Microsoft (MSFT), Hewlett-Packard (HPQ), IBM (IBM), Intel (INTC), and Apple (AAPL) in unison. Cisco's stock is trading near its 52-week low (BusinessWeek, 2/5/08) of $23, and the shares could head lower in coming weeks, analysts say.

Sales fell off sharply in January compared with December, Chambers said during the conference call. January orders for the company's gear, used to knit together corporate data networks and beef up Internet capacity by telecom providers and cable TV operators, rose just 10% compared with a year ago, missing Cisco's internal forecasts by 4 to 5 percentage points. It was the first time in five years Cisco didn't make its January numbers, Chambers said. The company expects comparable order growth for several months, he said.

"A Confidence Issue with CEOs"

Weak spending by retailers as well as automakers and other transportation companies hurt worst. Still, the financial-services companies that were the primary culprit of first-quarter softness increased spending 21% during the second quarter, which ended Jan. 26. "We cut the data every way imaginable," said Chambers. "What you're almost seeing is a confidence issue with CEOs."