Cisco's outlook tempers optimism

CHICAGO -- Cisco Systems Inc.'s cautious comments regarding corporate spending on its Internet routing equipment punctured market optimism yesterday that technology spending was set for a rapid rise.

"This is a reality check," said Richard Steinberg, the president of Steinberg Global Asset Management, a Florida asset management firm that sold half its Cisco holdings ahead of the earnings report Tuesday due to its lofty valuation.

"It's not bursting a bubble, but maybe it's pricking a hole in the balloon a little bit to slowly let some of the air out," he added.

Shares of the world's largest maker of gear that directs Internet traffic closed down almost 9 percent, while the technology-laced Nasdaq Composite index and the American Stock Exchange Network index finished down 2.5 percent and 5.2 percent, respectively.

Investors see Cisco as a benchmark for corporate and government spending because about 75 percent of its revenue comes from those customers. The rest comes from the telecommunications sector, where spending appears to be stabilizing and even increasing in areas Cisco serves, including Internet voice transmission.

On Tuesday, the San Jose, Calif. company posted a profit in its fiscal second quarter on strong sales, both of which topped analysts' expectations.

However, Cisco's outlook for sales growth of up to 3 percent in the current quarter disappointed investors given recent strong results from other tech companies, including International Business Machines Corp. and Juniper Networks Inc.

Cisco chief executive John Chambers said the recovery has begun, but added chief executives remain unusually cautious about spending and hiring at this point in the rebound. The company also cited weaker-than-expected orders in the last two weeks of January.

"It wasn't a blowout quarter," said Tim Ghriskey, the president of Ghriskey Capital Partners, a Connecticut investment management firm that owns a small stake in Cisco.

"It wasn't as big of a positive surprise as we've seen from a lot of other companies," Ghriskey added. "Management talked down expectations in perhaps somewhat of a strange way."

Cisco's forecast that sales in the current quarter, its fiscal third, would rise 1 to 3 percent from the previous quarter struck several analysts as overly conservative. J.P. Morgan estimated sales will rise 3.6 percent, while Prudential forecast 4 percent growth.

Henry Asher, the president of the Northstar Group, a New York money manager that owns a very small position in Cisco, said the company's stock simply got too pricey given its growth prospects.

"It's not the most exciting financial story I've ever heard," he said.

However, some analysts said investors always overreact.

"Investor expectations always run between too optimistic and too pessimistic," said JMP Securities analyst Samuel Wilson, who has a "market perform" rating on Cisco and does not own shares. "2004 is going to be a growth year and somewhere in the next 60 days it will be a great opportunity to buy Cisco again," he added.

In its biggest one-day decline since October 2002, Cisco's stock fell $2.33 to $24.08 in the heaviest trading on the Nasdaq.