Posted by: Peter Burrows on February 5, 2008
In this Internet Age we’re living in, few companies are as clear a bellweather for the health of tech than Cisco. So all eyes are on tomorrow’s earnings call—hoping CEO John Chambers’ remarks appropriately reflect investors’ gloomy mood about tech spending, without darkening it too much further. Already, the stock has sunk to its 52-week low of $23. While most analysts seem to think Cisco will hit consensus estimates for this quarter, they’re expecting Chambers to say that revenue growth in the next few quarters will be towards the lower end of the 13%-to-16% range Cisco has promised, rather than the current April quarter consensus estimate of 15.5% growth. “I don’t think there’s much of an issue regarding the January quarter,” says Pacific Crest Securities analyst Tim Daubenspeck. “But he’s probably going to have to acknowledge [some weakness in tech spending]—not a trainwreck, just a slight downtick.”
By current standards, that’d be the rosy view. But one analyst, at least, wonders if Cisco is that good a guidepost for tech’s financial future. JMP analyst Sam Wilson notes that Chambers was one of the last tech execs to wax optimistic before the sickening slide when the Net Bubble burst in early 01. And he notes that just last August, two earnings calls ago, Chambers sounded as optimistic as he (or most other analysts I’ve spoken with) had heard him in years. “Unfortunately, I think [Chambers] may have marked the peak again.”
No doubt, Cisco has had a role in helping the Street readjust its expectations downward; in October, Chambers’ comments about “lumpy” spending by US corporations helped catalyze the plunge in NASDAQ that still ensues. But Wilson worries that Cisco, with its famously aggressive salespeople and famously cheery CEO, may not register the depth of the serious downturn that Wilson thinks is coming until it’s too late to prepare. “There’s a six month lag time between the general economy slows and what happens with tech spending.”
No doubt, Chambers has a thin margin for error for tomorrow’s conference call. Clearly, his words—“tone”, as they say—will be as important as Cisco’s results. If he guides more conservatively than expected, that could turn into a self-fulfilling prophecy. Given Cisco’s huge market share, CIOs will take it as a cue that their peers are pragmatically dialling down their tech spend already—meaning they probably should, too. But if Chambers doesn’t guide down enough, many investors won’t believe him, anyway.