"Air Pockets" Sink Cisco Systems

Written By Brian Hicks

Posted November 11, 2010


It’s a shaping up to be a tough day for one of the nation’s biggest tech bellwethers.

After cutting its full year sales forecast by a hefty $1 billion dollars, shares of Cisco Systems stock (NYSE: CSCO) are off by over 16% on 65 million shares traded in the premarket action.

Citing the sudden appearance of “a couple of air pockets” on the conference call, CEO John Chambers was left on the defensive as the tech giant revealed sales missed on the top line by more than $500 million in Q1.

That left investors with an eerie sense of déjà vu as the company stumbled for the first time in six quarters.

Of course, as you may remember, it was in his October 2007 earnings comments when John Chambers spooked the markets and basically marked the top of the last major run for the tech sector. (Who said the bell doesn’t ring at the top?)

A bellwether, by the way, is loosely defined as anything that tends to create, influence or set trends.

It comes from the Middle English word “bellewether” and has nothing actually to do with the “weather” as we know it.

It actually refers to the practice of putting a bell around the neck of a castrated ram (a wether) so that it may lead its flock of sheep.

So here’s the clang, clang, clang, that’s leading the market lower today.

From Bloomberg by Joesph Galante entitled: Cisco Plunges After Forecast Falls Short of Estimates


Cisco Systems Inc., the world’s largest maker of computer networking equipment, dropped the most in more than 12 years in Nasdaq trading after its profit and sales forecast fell short of analysts’ estimates.

Revenue in the fiscal second quarter will be about $10.1 billion to $10.3 billion, San Jose, California-based Cisco indicated yesterday on a conference call. Excluding some costs, earnings will be 35 cents a share at most. Analysts projected sales of $11.1 billion and profit of 42 cents on average, according to estimates compiled by Bloomberg.

The company faced a “challenging economic environment” last quarter, Chief Executive Officer John Chambers said. He blamed the slump on lower government spending in developed countries and market-share losses to rivals such as Motorola Inc. Competition also has forced Cisco to cut prices on some products and seek acquisitions to maintain growth.

Cisco’s first-quarter earnings, excluding some costs, were 42 cents a share, while sales climbed 19 percent to $10.8 billion. Analysts surveyed by Bloomberg predicted profit of 40 cents a share on sales of $10.7 billion.

Investors were disappointed that revenue was unable to surprise to the upside,” said Bill Kreher, an analyst at Edward Jones in St. Louis. He recommends buying the shares and doesn’t own any.

Net income rose 8 percent to $1.93 billion, or 34 cents, in the period, which ended on Oct. 30. That compared with $1.79 billion, or 30 cents, a year earlier.

Investors look to Cisco as a bellwether for the technology industry because the company dominates the market for routers and switches, products that direct the flow of Internet traffic. Companies buy its switches for corporate networks, while phone and Internet-service providers typically buy Cisco’s more- expensive routers.”

By the way, it is worth noting that tech heavy shares of the PowerShares QQQ have been flirting lately with a close near their 2007 high of $55 a share.

In fact, the QQQ’s are up about 25% since the end of August. That alone should be enough to put the ETF under some serious pressure in the days to come.

Here’s one more thing to know about Cisco shares: Insiders have sold over 6 million shares in the last six months.

So much for being “surprised”…

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