Cisco can't buy a break

Stock drops 4.5% after stellar quarter

By Cisco Subnet on Fri, 05/14/10 - 12:28am.

Cisco's solid third quarter of fiscal 2010 was tempered somewhat by the company's outlook for the fourth quarter. Investors were a bit disappointed that Cisco did not forecast a July quarter that, in their eyes, would show a significant uptick in sequential sales.

But what a quarter the third one was: Cisco's revenue grew 27% from 2009's Q3 while EPS, excluding expenses, charges and other items, was up 41%. Revenues beat Wall Street estimates by $200 million, and EPS exceeded expectations by $.03 - though investment firm Canaccord Genuity cautions that $0.02 of the upside came from a lower than expected taxes and higher than expected interest and other income.

Others analysts were downright exuberant on Cisco's quarter: "Cisco is a marketing and execution machine," wrote Avian Securities analyst Catharine Trebnick in her bulletin on the results.

The company realized double digit growth across all of its major product categories, and each segment saw sequential growth - the first time that's happened in six quarters, Trebnick notes. Cisco saw double digit order growth across all major regions.

Taken together, these are indications that IT spending is rebounding dramatically from the Great Recession of that past few years. Indeed, in addition to strength in traditional routers and switches, Cisco now has over 900 customers for its Unified Computing System data center consolidation platform (up from 400 a quarter ago), and the Nexus 7000 data center switch is on track to achieve its expected $1 billion annual revenue run rate.

UCS is on a $200 million annual run rate, analysts note.

An extra week in the April quarter didn't hurt things, according to Oppenheimer & Co. analyst Ittai Kidron. Cisco logged another $300 million to $400 million in revenue because of it, he notes.

But that extra week in Q3 may be behind the company's guidance for Q4, which knocked the stock back after hours on Wednesday -- the day Cisco announced its results - and 4.5% on Thursday. The company set revenue expectations at 25% to 28% above 2009's Q4, and up 3% to 5% sequentially, with recently-acquired videoconferencing leader Tandberg contributing about $200 million.

But sequential comparisons are "negatively impacted" by that extra week of $300 million to $400 million in additional revenue in Q3, Kidron notes. Investors certainly reacted that way.

So if the outlook for Q4 disappoints, it's not because business is softening, Kidron notes:

Cisco's demand trends remain favorable. We estimate FY4Q EPS will decline sequentially but attribute this to the extra week in FY3Q, Tandberg integration and investments necessary to support growth rather than a slowdown.

Paul Mansky of Canaccord Genuity concurs:

Cisco is on the front side of one of the more comprehensive product refreshes in its recent history heading into what promises to be a multi-year re-architecting of the data center and communications network... the company is unrivaled in its product portfolio, partnership suite and distribution network.