Jim Duffy: Trying to make sense of Cisco

Cisco Systems Inc. says we have yet to hit bottom. But Cisco also says the industry can grow between 15 per cent and 50 per cent.

Can we believe either of these statements?

In a widely anticipated announcement, Cisco last week reported its fiscal 2001 fourth quarter and year results that met expectations but provided little visibility into which direction the industry is headed.

Cisco did say, however, that the industry may not have bottomed out yet.

“No one really knows when the economy or capital spending will bottom out,” said Cisco CEO John Chambers in a conference call with Wall Street analysts, adding that it may occur over the next two quarters. “It may get worse before it gets better.”

In the same conference call, Chambers said “only time will tell” if Cisco and the industry grows in the 15 per cent to 20 per cent range, as most pundits have it, or the 30 per cent to 50 per cent range in “good economies” with “good capital spending.” The latter forecast was a common refrain during Cisco’s heyday of 1998 to mid-2000.

These days, Chambers admits the 30 per cent to 50 per cent range is “a stretch, but achievable goal” for Cisco or one of its peers. Really?

You could almost hear analysts’ eyes roll when Chambers offered up these numbers again during last week’s earnings call. What’s he smoking?

For the short-term, they’re unachievable: Cisco’s sales grew 18 per cent in fiscal 2001 from fiscal 2000. Indeed, the company is coming off “the most challenging year in Cisco’s and probably the industry’s history,” Chambers says.

And the outlook isn’t any brighter over the next three to six months. Cisco forecasts sales to be flat to down 5 per cent in the first quarter of 2002 compared to the fourth quarter of 2001. And the next two quarters are when things may bottom out for Cisco and the rest of the industry, Chambers says.

So when do we get back to the “30 per cent to 50 per cent range” days? All of the dot-coms and most of the competitive local exchange carriers are gone. All of the once-smitten venture capitalists are once-bitten. Buildouts have ground to a halt, and there’s a glut of fibre or bandwidth, or both.

Is John Chambers’ stretch goal really a stretch of the imagination? Or stretched truth?