* Shares fall 14.2 pct to lowest level since July 2009
* Cisco long considered a tech bellwether
* Lower margins a worry, competition seen heating up
(Adds details on stock performance)
By Ritsuko Ando
NEW YORK, Feb 10 After disappointing Wall
Street quarter after quarter, Cisco Systems Inc (CSCO.O) has
lost its status as a tech industry bellwether.
Cisco shares fell 14.2 percent on Thursday to their lowest
level since July 2009, as eroding margins stoked concerns that
competition and dwindling public sector spending are stunting
its growth. [ID:nN08294447]
Shares of long-time rivals such as Alcatel-Lucent ALUA.PA
and Juniper Networks Inc (JNPR.N), by contrast, were doing just
fine -- showing investors believe Cisco's problems are its
It was the third time in as many quarters that the world's
top maker of routers and switches stunned the market with a
Including the market's cautious reaction to Cisco's solid
report last May, it would be the fourth straight quarter of
post-earnings decline in share price and marks a further
divergence from the market's general recovery.
Graphic on Cisco vs overall market,
Graphic on technical support levels,
A fall in gross margin to 62.4 percent from the previous
quarter's 64.3 percent and a 7 percent year-on-year decline in
switching revenue was particularly worrying, and overshadowed
stronger-than-expected results for the January quarter.
Cisco Chief Executive John Chambers said the shortfall was
partly due to customers being in between buying newer switching
products and that margins would rebound. Analysts were not
"CEO Chambers cited pricing pressure resulting from
cannibalization by Cisco's own higher performance low-end
switches, which we believe is actually a symptom of higher
levels of competition," said Morgan Stanley analyst Ehud
Investors have long looked to Cisco as an early indicator
of overall technology spending. The breadth of its customer
base, which ranges from small U.S. businesses to foreign
governments, affords Chambers a clear view of economic trends.
But Cisco's recently cautious outlook makes it look like
the exception in an otherwise upbeat tech sector.
Even Alcatel-Lucent, a Franco-American rival that has been
struggling since a 2006 merger, has been showing signs of
turning the business around. It offered an upbeat report on
Thursday, sending its shares up 18.5 percent to their highest
level since October 2009.
"Cisco was one of the only networking companies to report
sequential revenue declines in what was a healthy IT spending
environment," Piper Jaffray analyst Troy Jensen said in a
"The company is clearly losing share in two significant
product categories, with switching sales down sequentially for
three consecutive quarters and router sales declining 8.9
Cisco also faces new competition from such companies as
China's Huawei Technologies Co Ltd [HWT.UL] and Hewlett-Packard
HP, which bought small network equipment maker 3Com, has
been offering discounts to customers who trade in Cisco
products. Cisco is retaliating by lowering prices and offering
free financing or pay-later plans, analysts said.
"We believe Cisco is now being forced to price its newest,
higher performance switches at prices equal to or lower than
its older products, resulting in a hit to both revenue and
gross margin," Gelblum said.
Chambers also warned that public-sector orders will
continue to be weak in the United States, Europe and Japan,
where governments are trying to control their debt.
But with few other tech vendors complaining about weaker
public spending, the issue may be specific to Cisco.
Piper Jaffray cut its rating on Cisco shares to neutral
from overweight. Stifel Nicolaus downgraded its recommendation
to "hold" from "buy," while Credit Suisse cut its price target
to $24 from $27.
CHARTS POINT TO DECLINE
Cisco shares fell $3.12 to close at $18.92, their lowest
since July 2009. Shares of Juniper rose 7.6 percent to $43.40
and the Nasdaq finished up 0.05 percent.
But with Cisco's products playing a key role in expanding
Internet and mobile traffic, some investors and analysts say it
is still a good long-term investment.
"I'm really grappling with Cisco," said Blaylock Robert Van
analyst Joel Achramowicz.
"Quite frankly, Cisco being down $3, I just can't stomach
it ... I think the long-term value is inherent in the company.
They're making major investments that are going to pay off down
the road," he said, adding that he was lowering his
recommendation to a "buy" from "strong buy."
Technical analysts, however, pointed to a bearish trend.
"If you went on the chart alone, even before last night's
earnings, this is not a good stock chart," said Richard Ross,
global technical strategist at Auerbach Grayson in New York.
"You have a well-defined downtrend."
Cisco's cycle peaked with the overall market last April.
Unlike the Nasdaq 100, which is up nearly 15 percent from its
April high, Cisco failed to rally last summer and missed the
recovery that has taken the S&P 500 to its highest level since
Technical charts showed the next level of support around
$17.80, where it bounced off to rally in July 2009.
(Reporting by Ritsuko Ando; Additional reporting by Rodrigo
Campos in New York, Doris Frankel in Chicago, and Jennifer
Robin Raj in Bangalore; Editing by Maju Samuel, Derek Caney and