Last Wednesday, the US market took off following Cisco Systems Inc.'s third-quarter 2002 results of flat revenue and earnings a penny better per share than the second quarter.
Cisco's earnings were also a penny better per share than Wall Street expectations, so the market interpreted Cisco's results as a sign that the telecom industry slump is over.
Not so fast. Earnings improved based on gross margin improvements and expense controls. Revenue was flat, as were U.S. enterprise bookings, which Chief Executive Officer John Chambers admitted was a positive sign but nowhere near an emergence from the woods.
"It's too early to call a possible turnaround," he told analysts during an earnings conference call.
And service provider bookings? In the U.S., they were down by double digits compared to the second quarter. Internet routers were down 10 percent sequentially while optical saw a "major" decrease, he says.
Indeed, Cisco still has its work cut out for it in the service provider world even if the sector comes storming back. Chambers says Cisco is using the current downturn as an opportunity to build stronger relationships with the operational side of incumbent carriers, the goal being to become the No. 1 or No. 2 vendor to incumbents.
Some analysts believe this strategy is smart and about time.
"Cisco's best bet is that the continued downturn will further weaken its competitors in telecom equipment, while allowing Cisco more time to relearn how to work with the established carriers," says Bill Lesieur, director of Technology Business Research in Hampton, New Hampshire. "Cisco is widely acknowledging its missteps in entering the service provider market during the high-growth years of the late 1990s when the company was betting heavily on the emerging carriers to disrupt the incumbents. The delay in the telecom market recovery will allow Cisco to fine-tune its go-to-market approach to winning over established carriers."
That will be key, because UBS Warburg estimates that Cisco's overall service provider sales were down 10 percent sequentially, while consumer/enterprise were up 2 percent to 3 percent. Warburg believes service provider sales now account for only 15 percent of Cisco's revenue, excluding sell through of enterprise products through service provider channels. This is down from a peak of more than 30 percent, according to Warburg.
So why did the Dow rocket up 300 points and the NASDAQ 123 last Wednesday? Lesieur and Warburg believe Cisco is emerging from the bottom.
"We found the tone of management comments much improved from last quarter," says Nikos Theodosopoulos, Warburg's senior analyst for Communications Equipment. "We believe the worst is behind Cisco."
Perhaps. But Lesieur offers this caveat: "Cisco had solid results, but Cisco - like its telecom competitors - does not expect a recovery in the service provider market this year. Cisco's future as a leader in the service provider market for communications equipment is still uncertain."