Tuesday, November 09, 2004

Nothing pretty about Cisco

There wasn't any thing pretty about CSCO earning report. Lets begin with what went wrong (with usual amount of paranoia-no pun intended) :
1)Gross margins declined because a) they shipped more new switches which aren't being produced as profitably as before b) they didn't ship enough GSR routers because JNPR keeps winning at carriers like VZ c) Linksys product shipments increased because we are moving into the holiday season and those have less than half of the overall gross margins.
2) Orders were down and book to bill was below 1, did you hear that - they said "below 1" not slightly below. After nice order pickup last quarter, what happend? No explanation except that it was a seasonally slow quarter. Both router and switch orders declined- isn't that their bread and butter?
3) Didn't see any big budget flush from Government and do not expect any year-end budget flush from carriers or enterprise customers.
4) Chinese are coming! oh really? Huawei made Cisco play on the pricing field and Cisco lost with revenues from China down and hurting on the gross margin level as well.
5) Inventories were flat after being up for last 3 quarters, flat is not good since most people expected a decline. This is not really good for Communication IC guys like BRCM, PMCS, CY, IDTI, MRVL
6) Cash declined because they bought more stock than they ever have in one quarter, and on top of that they convinced the BoD to authorize another $10B to buy more stock. Now does this mean they can not fine enough companies to buy to drive the next leg of growth or they think they can buy this stock and lower shares outstanding therefore showing EPS growth even if the top line doesn't grow? Nice trick if you have the cash to play it.
7) They think the revenues will grow 1-3% in January quarter, below what most people had been expecting and that is before we get into April which is also a slow quarter- so that means basically very little growth for next six months.
Now to what went right at Cisco:
1) Linearity improved into last weeks of quarter.
2) Think about L4-L7 as the next growth area, good for PKTR, FFIV and RDWR which are already there. (that's really not a positive - is it?)
3) I am looking for more!

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