Looking at Cisco Systems (Nasdaq: CSCO) today, you might think that the Internet was about to go dark. The networking giant reported earnings last night, and got $11 billion shaved off its market cap overnight, only to bounce back above its previous closing price later in the day.
The other side of the coin
If you tuned in to the earnings call, you'd hear a fairly optimistic assessment from CEO John Chambers, although he also outlined an admittedly forlorn forecast for the next quarter. January sales trends pointed to about 10% year-over-year growth, assuming the ordering pattern stays the same. Then he ran the gauntlet of surly analysts, where nearly every question seemed to be a variation of, "Hey, John, what's up with that 10% guidance? Are you about to spiral down the drain?"
I understand the Wall Street crowd's consternation, to some extent. After all, technology bellwethers like IBM (NYSE: IBM), Microsoft (Nasdaq: MSFT), and Texas Instruments (NYSE: TXN) lined up earlier in this earnings season to indicate positive trends on a global scale, regardless of any weakness in the American economy. For Cisco to point down now just does not compute.
But the last question and answer of the night explained a lot of the knee-jerk downswing: It's all in our heads. Or rather, because CEOs and CIOs feel bad about the recession talk, they're holding off on their major upgrades right now.
Sad CEOs
As Chambers said:
When I talk to many CEOs, most of them would, say, start off with: 'I feel pretty good about my business, but I don't like what I'm hearing and seeing.' And that increases when you see large movements on their stock. We do think that people tend to hesitate and maybe put people through more hurdles to get approval, more signatures, and a little bit tighter return expectations until they figure out how does this look.
Chambers isn't even working out on his treadmill the way he used to -- the CNBC morning shows are so depressing, they make him want to quit.
That reinforced the points Chambers had been trying to get across all night long: This is most likely a short-term bump in the road, not an early sign of systemic failure. Network needs are growing everywhere you look, mostly thanks to a relatively newfound hunger for mass quantities of high-quality video.
Building a need
Cisco likes to tout its high-definition teleconferencing system, but Google's (Nasdaq: GOOG) YouTube and its competitors play a bigger part in that equation, not to mention the high-def TV switchover. Yes, Cisco competes with the likes of Motorola (NYSE: MOT) and Ericsson (Nasdaq: ERIC) to build cable TV infrastructure, and it's more than just the Scientific-Atlanta set-top boxes. If you think of Cisco as a pure play on Internet technology, you're not alone, but you're sadly mistaken.
Chambers said his company's internal network traffic had quintupled in the past year alone, thanks in no small part to its penchant for bandwidth-hungry teleconferencing. That's important, because Cisco likes to share internal designs and their implications with its partners and customers to help them plan their network needs.
I'm not convinced that high-def digital business meetings will be the next big growth driver, but I haven't seen it in action. IT and business managers across the globe have seen it. And if that marketing-slash-research presentation doesn't work out, it's just one of 20 product families under Cisco's wing, any of which has the potential to make it big -- or bigger, if we're talking about network switches and so on.
Short story long, then recompressed
The times just ain't that bad. Cisco likes to give conservative guidance, hasn't missed an analyst target in six years, and when the results in this artificially constrained quarter met EPS estimates, it broke a streak of 11 outperformances in a row.
So the stage is set for a tasty bounce when Chambers' outlook proves to have erred on the conservative side in three months. You just can't keep a good company down forever.
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