Cisco's Quarter Open To Interpretation

When a company reports its quarterly earnings, anything that falls into the middle ground between thunderously good and gravely disappointing can often be viewed in a wide variety of ways.

Case in point: Cisco. The company reported its Q1, fiscal 2005 numbers on Tuesday, Nov. 9, on a conference call for analysts and the media. Net sales for the first quarter of fiscal 2005 were $6.0 billion, compared with $5.1 billion for the first quarter of fiscal 2004, an increase of 17.1 percent, and compared with $5.9 billion for the fourth quarter of fiscal 2004, an increase of 0.8 percent. Net income for the first quarter of fiscal 2005 was $1.4 billion or $0.21 per share, compared with $1.1 billion or $0.15 per share for the first quarter of fiscal 2004, and compared with $1.4 billion or $0.20 per share for the fourth quarter of fiscal 2004.

Sounds like a pretty good quarter, right? Depends on whom you ask. Some news stories about the results used words like "buoyed"and "emerging," while others chose to describe the numbers as "middling" and "tepid."

The truth is, they're all correct. Even John Chambers himself straddled the fence. During the call, the Cisco CEO said, "While there's always room for improvement, we are pleased with our execution in our key product categories, advanced technologies, geographies and other financial measurements." He also warned of continued market uncertainty that's being exacerbated by an increase in competition from low-cost Asian networking vendors, which have had increased success selling equipment abroad and figure to be players at least in the international market for the future.

But Chambers remains confident that these companies are working on a volume play and don't offer the same functionality as Cisco products. "They've had a lot of success in their home country because, typically, China doesn't require a lot of the features that are required in the U.S. and Europe; that's why you have not seen any major inroads in U.S. markets with the Chinese vendors," he says.Cisco's profits met Wall Street's expectations, though its revenue fell a little short of expectations, the result being that Cisco shares traded down on Wednesday. Also, three equity analysts have downgraded the company's stock in recent days, making a total of five since August. But the company's recent expansion into other technologies such as IP telephony, home networking, wireless and security is beginning to bear fruit, with growth rates during the quarter coming in at approximately 30 percent for the new lines.

All of Cisco's technologies will be helped along in part by the recent opening of a new R&D center in Shanghai, China. "Our development efforts are focused on increasing our market share in our core markets--routing and switching--and our continued investment in advanced technologies," Chambers says. "One of Cisco's chief differentiators is our ability to make targeted investments--not only through R&D, but also through acquisitions and partnerships--to address our customers' needs through a systems approach with scalable intelligence and performance."How do VARs read and react to financial reports such as these? One Cisco partner says he sees nothing but good news this quarter.

"I'm absolutely pleased with their numbers; you have to like their profits," says Tom Shaw, president of Wide Area Management Services in Santa Clara, Calif. "It shows that the restructuring they did in early 2004 is paying off, and they're even beginning to hire again."

He says the investment community's ambivalence about Cisco's performance doesn't necessarily translate to partners in the field. "What Wall Street says about it is very different than how Silicon Valley looks at it, because we're seeing it on a much more micro level," Shaw says. He adds that while the competitive threat from Asia could prove to be challenging for all U.S. networking vendors, it hasn't been an issue for VARs so far. "It's not affecting my company, but some of my colleagues are very concerned with what's happening in Asia," he says.

"People in China just don't need a Cisco router, and a lot of the brand loyalty in Asia runs along nationalistic lines, so Chinese are buying from Chinese companies, Koreans buy from Korean companies, and so on. But the effect of the Asia-Pacific rim on me is no effect, at least not yet."0