The Cisco Skid: Temporary Sanity?

The Cisco Skid: Temporary Sanity?

Len Hollie

Back-to-back quarters of lagging revenue growth has Cisco Systems on its heels for the first time — although it’s far from being knocked to the canvas, judging from investor reaction to the company’s stock.

Cisco certainly has taken a hit in terms of stock value; as of April 25, it was trading at under $16 a share, about a quarter of its value just six months earlier, when it had just racked up its 44th consecutive quarter of revenue growth. But Cisco’s slide has been nowhere near as precipitous as that of Lucent Technologies, and there are plenty of investors who remain vaguely bullish on Cisco’s prospects for a quick recovery.

Such sentiment might be forgiven, seeing as how it was likely induced by John Chambers’ dulcet tones during a conference call on April 16, when he was upbeat and predicted the company would soon return to earnings growth of 30%. Mere hours earlier, however, Cisco officials told investors that its revenue in its latest fiscal quarter would be about 30% below the $6.7 billion generated in the previous quarter.

More ominously, Cisco said it would write down to zero about $2.5 billion worth of equipment, representing a staggering two-thirds of its inventory. Investor reaction? Cisco’s stock closed down 3% on April 16 and ended the day as the eighth most actively traded issue in U.S. stock market history — 179.6 million shares changed hands. But by the end of the week, the stock was trading higher.

This reaction — or lack of reaction — came despite the fact that Cisco showed its revenue was plummeting and that equipment it had recently acquired had become worthless.

Companies write down inventory all the time, so that’s not unusual. But Cisco is not writing down obsolete or discontinued products — it is disposing of raw materials acquired only nine months ago. It may be the largest corporate inventory charge ever recorded. Cisco reported that raw materials account for 80%, or about $2 billion, of the write-down charge.

Market watchers point out that at the end of last July, Cisco valued its raw materials at $145 million. Can it be that $1.85 billion that’s now being written off is comprised of new equipment?

Keep in mind that large equipment write-downs usually presage a looming price war. Also, the combination of a huge write-down and a profitable next quarter doesn’t usually happen.

So this is where Cisco could get tricky. The written-off equipment will remain at the company, segmented from the rest of its gear in a metaphorical lockbox. If for some strange reason this gear, now deemed worthless, begins finding its way into Cisco’s sales channels, the new revenue would give it a killer quarter.

Still, investors really have to wonder whether Cisco is still a growth company or if it’s becoming more of a cyclical company and not a consistent growth player at all.

Copyright © 2004 Ziff Davis Media Inc. All Rights Reserved. Originally appearing in The Net Economy.