Cisco's Stock Tumbles

Cisco announced a 26 percent increase in net sales for the year-over-year quarter and a 16.8 percent increase in net sales over fiscal year 2003. The news helped briefly raise Cisco's stock price by more than $0.25 per share, part of a larger stock market rally that was bolstered by the Federal Reserve's announcement that it will raise interest rates 25 basis points to 1.50 percent. The Nasdaq rose 10 points to 1,785, with numerous tech stocks--such as EMC, Hewlett-Packard, IBM, Microsoft, Sun and others--also on the rise. Even Cisco competitor Nortel saw its stock price benefit from the tech industry's solid showing.

On Wednesday, however, the market for tech stocks did an abrupt 180 after investors re-evaluated the warnings issued by Cisco and National Semiconductor during their earnings calls. By midday, Cisco's price had fallen by 10 percent, and HP, Intel and IBM also were getting hammered.

The turnaround happened once analysts and investors noted that Cisco had merely met its quarterly projections rather than surpassed them. Cisco also projected anemic growth for the coming quarter and saw its inventory rise by only 7 percent after a 20 percent jump during the previous quarter. Most damning of all were Cisco president and CEO John Chambers' comments about the state of technology spending. "Most of the CEOs that I talk with view the economy as growing at a modest level and are a little more cautious...than they were a quarter ago," he said on Tuesday.

The news got worse after Merrill Lynch downgraded Cisco from buy to neutral, citing the narrow view the company has into its coming quarter; recent and expected declines in the software, storage and security sectors; overall market uncertainty about the November elections; and the concern that Cisco will have less operating margin in coming quarters than it's normally accustomed to. JP Morgan and UBS also lowered their Cisco ratings on Wednesday. Cisco's net sales came in at $5.9 billion for the quarter and $22.0 billion for the year. Company officials credited robust corporate demand for a higher quarterly profit--$1.4 billion, or 20 cents a share, compared with $982 million, or 14 cents a share, in the year-earlier quarter. Pro forma net income for the fourth quarter was $1.5 billion or $0.21 per share, compared with $1.1 billion or $0.15 per share for the fourth quarter of fiscal 2003, and compared with $1.4 billion or $0.19 per share for the third quarter of fiscal 2004.

These numbers gave Chambers reason to hold onto some optimism, and he noted that the company posted the highest GAAP, pro forma net income and earnings per share in its history. "This was a record-breaking quarter for Cisco on a number of financial and operational levels," he says. "The investments we've made in emerging markets around the world, coupled with continued innovation in our core business and advanced technologies, are generating record results."

Among the highlights from the past quarter were Cisco's purchase of the intellectual property and other assets, and the hiring of most of the engineering team, from router developer Procket Networks, as well as the acquisition of wide area file services solution provider Actona Technologies and decision-support application developer Parc Technologies.

The company also introduced the world's (Guiness-certified) highest-capacity Internet router, the Carrier Routing System (CRS-1), which can scale to 92 terabits of bandwidth capacity and provide a 40-Gbps interface. And Cisco announced alliances with Trend Micro and IBM, the former to integrate network infrastructure and security systems with Trend Micro's worm and virus technologies, vulnerability assessment and real-time outbreak-prevention capabilities; and the latter to help organizations integrate and implement converged voice, video and data systems.

In the partner category, Cisco added the SMB Select Partner designation to its Channel Partner Program to differentiate, recognize and reward its channel partners who focus on selling into the small and midsize business market. Cisco also introduced the Global Services Alliance program, enabling Cisco and participating partners to provide co-branded technical support services to customers requiring consistent global information technology support capabilities.