I’ve been saying for weeks that the markets would be waiting for Cisco’s earnings report — which was released yesterday after the bell — to set the tone for the post-earnings season world.
That’s because Cisco was a winner of “the gorilla game” as it was played during the late great bull market. As a tech gorilla, it is the dominant force in a technology domain that it once invented and now controls. Being a gorilla means that Cisco has more information about its global markets and its global supply chains — running in both directions, up from it to its customers and down from it to its suppliers — than anyone else on earth. So when Cisco talks at the end of earnings season, the markets listen. Because there will never be better information about what we can expect out of “warnings season” which, of course, begins the moment that earnings season ends.
So what did we learn last night when the gorilla spoke?
By now you’ve seen the headlines. Cisco generally met expectations for the quarter — but, of course, the comparables look simply awful. Even if no one was terribly surprised, there’s no hiding from the truth that the quarter’s $7 million net profit is down a neck-snapping 99% from a year ago.
Yes, the analysts tried to find something encouraging in it. For example, Credit Suisse First Boston’s networking analyst Lissa Bogaty told clients last night after Cisco’s conference call that the company gave “squishy signals” that maybe business is improving a bit here and there. I suppose that’s because Cisco’s indefatigably cheerful CEO John Chambers — whose high, southern-accented voice sounds more and more like Truman Capote’s with every passing quarter — still raps about “breakaway strategies,” “tornado markets,” “healthy paranoia,” and other expressions from the bull market business books now moldering in the remainder bins.
But Chambers admits that “no one really knows” when the global economy and capital spending will turn around. He admits that Cisco’s famous 30% to 50% top line growth rate is now just a “stretch goal, but achievable” if the economy recovers. He guided revenues for the next quarter down to anywhere from flat to down 5%. Real recovery, he says, is now two to three quarters out, with “Europe and Asia/Pacific getting worse before they get better.” So even Lissa Bogaty ended up lowering her numbers, squishy signals or no squishy signals. Why be a hero? After all, “No one really knows.”
Cisco’s report last night was all the more important — and perhaps all the more disappointing — because it was our first opportunity to observe how a networking gorilla behaves in a technology recession. This is when it should be using all its vast resources, including an $18 billion cash hoard, to wipe out competitors like Juniper Networks so that it comes out of the recession with no rivals left standing.
Morgan Stanley’s networking analyst Christopher Stix has been telling clients about Cisco using a “golden hatchet” strategy to win core router business away from Juniper at any and all costs. And we’ve heard unconfirmed reports from industry insiders that, in at least one instance, Cisco went so far as to offer to buy all a customer’s existing Juniper gear if they would promise to become an all-Cisco shop. That’s the way to play!
That’s the kind of thing chip gorilla Intel is doing, slashing prices in order to finally bury its smaller arch-rival Advanced Micro Devices once and for all. Sure, Lehman Brothers’ chip analyst Dan Niles says he’s shocked — shocked! — to see Intel “detonate a price bomb” (words he no doubt typed on his new Dell Dimension 8100 with a 1.4 gigahertz Intel Pentium 4 processor, which he snagged for a mere $999). Intel can do that because the grizzled old survivors in the semiconductor industry know all about the recession thing. The chip-heads aren’t afraid of the dark because they know that the darker it gets, the closer must be the dawn — they’ve been through it all before. You just slash prices and make it up on volume when the inevitable turnaround comes — and the competition ends up dead.
But it takes a real gorilla to have the kind of courage to pull off that kind of move — you’ve got to be willing to disappoint the street for a couple of quarters while you spend the money it takes to swing that golden hatchet. And John Chambers just doesn’t appear to have enough hair on his chest.
Last night Chambers had to disappoint Christopher Stix. Stix had hoped that Cisco could report 5% to 7% market share gains over Juniper for the quarter, but they reported only 3% to 5%. And Stix was hoping that they could do it on improving margins thanks to ruthless cost-cutting and lower tax rates, but Cisco reported pro forma margins actually falling for the quarter due to lower volumes. So when Chambers was questioned by several analysts — including Stix — on how much of his gross margins he was willing to trade off for more market share, he took every opportunity to say that his three top priorities would be profits, profits, and profits. That’s not the way a gorilla is supposed to talk. And now Stix has taken down his numbers anyway.
I said at the outset that Cisco’s report would set the tone going forward for the whole market. And so it has. It’s the sour tone of a missed opportunity, a profile in no courage. So now the NASDAQ will have to continue to wander, rangebound, looking elsewhere for leadership. This was Cisco’s opportunity to take its place in the Tech Gorilla Hall of Fame, alongside Microsoft and Intel. And John Chambers muffed it.
The views expressed within represent those of the author, and do not necessarily reflect those of Capitalism Magazine’s publishers.
