February 10, 2011 / 12:27 AM / in 7 years

Cisco shares plummet as bellwether becomes laggard

NEW YORK (Reuters) - After disappointing Wall Street quarter after quarter, Cisco Systems Inc 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.

Shares of long-time rivals such as Alcatel-Lucent and Juniper Networks Inc, by contrast, were doing just fine -- showing investors believe Cisco’s problems are its own.

It was the third time in as many quarters that the world’s top maker of routers and switches stunned the market with a weak outlook.

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.

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 entirely convinced.

“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 Gelblum.


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 report.

“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 percent quarter-over-quarter.”

Cisco also faces new competition from such companies as China’s Huawei Technologies Co Ltd 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.


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 mid 2008.

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 Steve Orlofky

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