Taking time from the annual high-profile World Economic Forum in Davos, Switzerland, Cisco CEO John Chambers sharpened his warning of three weeks ago that Cisco faced two quarters of earnings uncertainty. But to the delight of long-term investors, he said that long-haul growth forecasts of 30-50% might be too conservative. Telecoms might be cutting capital expenditures now, but enterprise spending is only slightly softening and poised for continued growth.
Nestled among Switzerland's snow-capped peaks and the digerati, CEO John Chambers of Cisco Systems (Nasdaq: CSCO) warned that a slowing U.S. economy could even further dampen his company's growth.
Speaking to journalists at the World Economic Forum at Davos, Chambers added to his remarks three weeks ago that there was a "current lack of visibility" for near-term Cisco earnings, foreseeing a two-quarter disruption. Chambers' words started an avalanche, pushing Cisco's stock down as much as 7% in this morning's trading. It closed Friday at $38.38, within a 52-week range of $31.94 and $82.00.
Reasons for reduced near-term growth
Chambers attributed the slowing to even deeper capital expenditure cuts by U.S. telecoms, whose trail of tears lengthened this morning with AT&T's (NYSE: T) bad news. He said that enterprise customers -- businesses investing in Internet applications -- still must increase productivity and will not slow their spending as much. His European manager, Bill Nuti, observed that the "European enterprise market is growing faster this year than last year."
For the next two quarters you're going to look at a pretty wide range of growth," he said.
Cisco faster than Fed Chambers took a shot at the Fed for passing on a December rate cut, even though it acted between meetings in early January. To Chambers and others, Cisco and other businesses have a much quicker grasp on business activity than Alan Greenspan's Federal Reserve. "By late December and early January my customers had changed their spending plans for the first quarter and the year. That's what the Fed did not realize in December. Businesses are making decisions on rapid information flow, while the Fed waits for information that comes in later about three months."
Chambers can certainly brag about Cisco's turn-on-a-dime numbers facility, thanks to Larry Carter, senior vice president and chief financial officer. Carter is justly famed as a green eyeshade superwhiz for using the Internet to provide company executives with daily numbers on key financial elements, and the ability to close Cisco's worldwide financials in one day. Based on this kind of information for January, Chambers said that the networking industry would see "a lot of layoffs in this quarter" and that Cisco's employment growth will "slow dramatically."
Increased growth long-term Cisco investors focused on the long term, Chambers sang music: "Our expectation for the long run has in fact become better." He added, "Thirty to fifty percent sales growth over the long term is probably a bit conservative right now." Bill Mann (TMF Otter) believes that the best telecoms will survive and prosper -- and presumably be even bigger Cisco customers. And Chambers remains firm that the Internet will still drive Cisco's business, saying that it could double, if not triple or quadruple, productivity gains beyond what telephony, transportation, and electricity combined have provided.
Will all this be enough to provide 30-50% growth annually over five years, or what? For a company whose stock is selling at 62 times trailing 12-month earnings, investors may expect some short-term price declines. In response to the question whether Cisco will miss that 30-50% growth target this year, company spokesperson Abby Smith said "you could infer that."
A tough competitor
Reminding listeners of the ephemeral nature of business, Chamber pointed out that his "toughest competitor two years ago, Lucent -- very broad-based, many times our size -- doesn't make the top 10 anymore. It shows how quickly you fall from grace, and once a high-tech company trips, it is very difficult to come back." That's certainly why Chambers runs himself -- and his company -- so hard, craning over his shoulder at competitors such as optical and core router hotshot Juniper Networks (Nasdaq: JNPR), which happens to be showing just the kind of phenomenal growth that made Cisco famous.
As always, buy on bad news.
Stox
Nestled among Switzerland's snow-capped peaks and the digerati, CEO John Chambers of Cisco Systems (Nasdaq: CSCO) warned that a slowing U.S. economy could even further dampen his company's growth.
Speaking to journalists at the World Economic Forum at Davos, Chambers added to his remarks three weeks ago that there was a "current lack of visibility" for near-term Cisco earnings, foreseeing a two-quarter disruption. Chambers' words started an avalanche, pushing Cisco's stock down as much as 7% in this morning's trading. It closed Friday at $38.38, within a 52-week range of $31.94 and $82.00.
Reasons for reduced near-term growth
Chambers attributed the slowing to even deeper capital expenditure cuts by U.S. telecoms, whose trail of tears lengthened this morning with AT&T's (NYSE: T) bad news. He said that enterprise customers -- businesses investing in Internet applications -- still must increase productivity and will not slow their spending as much. His European manager, Bill Nuti, observed that the "European enterprise market is growing faster this year than last year."
For the next two quarters you're going to look at a pretty wide range of growth," he said.
Cisco faster than Fed Chambers took a shot at the Fed for passing on a December rate cut, even though it acted between meetings in early January. To Chambers and others, Cisco and other businesses have a much quicker grasp on business activity than Alan Greenspan's Federal Reserve. "By late December and early January my customers had changed their spending plans for the first quarter and the year. That's what the Fed did not realize in December. Businesses are making decisions on rapid information flow, while the Fed waits for information that comes in later about three months."
Chambers can certainly brag about Cisco's turn-on-a-dime numbers facility, thanks to Larry Carter, senior vice president and chief financial officer. Carter is justly famed as a green eyeshade superwhiz for using the Internet to provide company executives with daily numbers on key financial elements, and the ability to close Cisco's worldwide financials in one day. Based on this kind of information for January, Chambers said that the networking industry would see "a lot of layoffs in this quarter" and that Cisco's employment growth will "slow dramatically."
Increased growth long-term Cisco investors focused on the long term, Chambers sang music: "Our expectation for the long run has in fact become better." He added, "Thirty to fifty percent sales growth over the long term is probably a bit conservative right now." Bill Mann (TMF Otter) believes that the best telecoms will survive and prosper -- and presumably be even bigger Cisco customers. And Chambers remains firm that the Internet will still drive Cisco's business, saying that it could double, if not triple or quadruple, productivity gains beyond what telephony, transportation, and electricity combined have provided.
Will all this be enough to provide 30-50% growth annually over five years, or what? For a company whose stock is selling at 62 times trailing 12-month earnings, investors may expect some short-term price declines. In response to the question whether Cisco will miss that 30-50% growth target this year, company spokesperson Abby Smith said "you could infer that."
A tough competitor
Reminding listeners of the ephemeral nature of business, Chamber pointed out that his "toughest competitor two years ago, Lucent -- very broad-based, many times our size -- doesn't make the top 10 anymore. It shows how quickly you fall from grace, and once a high-tech company trips, it is very difficult to come back." That's certainly why Chambers runs himself -- and his company -- so hard, craning over his shoulder at competitors such as optical and core router hotshot Juniper Networks (Nasdaq: JNPR), which happens to be showing just the kind of phenomenal growth that made Cisco famous.
As always, buy on bad news.
Stox
