It took just a few words last month for Cisco Systems Inc Chief Executive John Chambers to regain some credibility with shareholders of the biggest maker of computer-networking gear.
Chambers, 52, told a packed ballroom of investors that with 24 days left in Cisco's first quarter ending Oct. 27, he was "very comfortable" with Wall Street's profit and sales estimates, which were based on forecasts he gave in August. The shares surged 22 percent that day and have risen 24 percent since.
The stock is down 79 percent from its record, though, and even investors who think Cisco will rebound before rivals say the drop in telecommunications-equipment sales that decimated stock prices, profits and workforces probably isn't over. They question Chambers' refusal to back down from a prediction that Cisco sales can rise 30 percent to 50 percent a year in "good" economies.
"Could there be a year where they get into that zone? Yeah, if everything's really perfect," said Ray Hirsch, senior equity analyst at American Express Financial Advisors, which held 62.5 million Cisco shares as of June 30. "But is that likely to be the average? No." The San Jose, California-based company was scheduled to report first-quarter results after US markets closed yesterday.
Sales probably fell 36 percent to US$4.17 billion from US$6.52 billion in the year-earlier period, based on the average estimate of analysts polled by Thomson Financial/First Call. That would represent a 3 percent decline from Cisco's fourth quarter.
Profit, excluding certain items such as acquisition expenses, dropped to about US$0.02 a share from US$0.18, according to a First Call survey.
Chambers, who eliminated 6,200 full-time jobs this year to reduce expenses, predicted Aug. 7 that first-quarter revenue would be unchanged to down 5 percent from the fourth quarter's US$4.3 billion. Investors, some worried about the effects of the Sept. 11 terrorist attacks, were heartened when Chambers stuck by those targets in October.
"To the extent that they can look out and see these things and have enough confidence in their business to express this to investors, that gives them increased credibility in my mind," said Chuck Thomas, senior managing analyst for the Dreyfus Premier Technology Growth Fund, which held 1.25 million Cisco shares as of June.
Cisco shares, often the most actively traded in the US, fell US$0.40 to US$17.26 on Friday and have fallen 55 percent this year, compared with a 64 percent decline in the Standard & Poor's Communication-Equipment Manu-facturers Index. Cisco, with by far the highest market value at US$126.6 billion, accounts for 49 percent of the index's weight. Cisco's high of US$82 was reached on March 27 of last year.
Chambers declined to be interviewed for this story, company spokeswoman Abby Smith said.
Investors are hoping Chambers says sales will improve this quarter from the previous three months. Cisco's revenue has declined sequentially for two straight quarters. Some analysts say neither Cisco nor peers such as Nortel Networks Corp are in the clear yet.
Slumping economies in the US, Europe and Asia are expected to reduce companies' spending on computers, software and telecommunications equipment next year, while phone and Internet carriers such as SBC Communications Inc are cutting capital spending by 20 percent or more.
Chambers has "done fine. I think it's really just an issue of the environment," said DeAnne Steele, co-manager of the BNY Hamilton Large Cap Growth Fund, which held 454,120 Cisco shares as of Sept. 30. "I'd be surprised if anyone knows what company spending is going to be like over the next quarter."
Brian Barish, who oversees US$2.3 billion as president of Cambiar Investors Inc, doesn't understand the renewed confidence in Cisco.
"A lot of people don't want to hear it, but I can't connect the dots without making things up to find a way to make the stock an interesting valuation proposition," Barish said, adding that Cambiar has never owned Cisco shares. "A lot of the predictions that they've made, they have seemed to be out of sync with the marketplace."
For his part, Chambers is trying to boost sales by reorganizing his managers around 11 product groups instead of three larger units separated by customer type. He also has avoided a more serious profit crunch by declining to cut prices steeply, analysts and investors said.
"I really believe that longer term, this company is very, very well-positioned to grow faster, significantly faster, than our economy as a whole," American Express's Hirsch said.
The reason, according to investors like Hirsch: Cisco has US$18.5 billion in cash and no debt; it has product lines where demand is increasing, such as network-security and wireless equipment; and companies will need to buy more gear eventually to handle surging Internet traffic.
As Cisco's historic largesse to investors has diminished, so has Chambers's compensation: He got nothing in the fiscal year ended July from exercising stock options, after reporting a US$156 million options gain a year earlier.
Chambers also got no bonus after being paid US$1 million the previous year. His salary fell to US$268,131, which was paid before Chambers announced in April that he would cut it to US$1 a year as a "symbolic gesture" to shareholders and employees.
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