Just weeks after Cisco reported that its third-quarter operating profit more than tripled to US$838 million from the year-ago period, the company’s shares dropped on reports that analysts from two firms have sounded the alarm over its financial standing.
Merrill Lynch’s Samuel Wilson sent up a yellow flag, warning that Cisco’s allowance for doubtful accounts grew from 2 percent in 1999 and 2000 to 26 percent, or $36 million — its highest ever — during the third quarter of 2001. As that allowance grows, it has the potential to alter the company’s operating margins and could cause reassessment of Cisco’s previously announced revenue.
Despite signaling for caution, though, Wilson did not change his ratings of the company’s stock. They still stand at “buy” for the mediumterm and “strong buy” for the long term.
Dresdner Kleinwort Wasserstein analyst Ariane Mahler was not so generous, dropping her rating from “hold” to “sell” because of concerns about Cisco’s gross profit margins, among other factors. Both Mahler and Wilson were prompted to act after Cisco filed its quarterly papers with the U.S. Securities and Exchange Commission (SEC).
The latest SEC filings and ensuing doubts about Cisco follow a remarkably good showing bythe company in the third quarter. In addition to its tripled operating profit, the company booked a net profit of $729 million, compared with last year’s third-quarter net loss of $2.7 billion. That turnaround led Cisco CEO John Chambers to remark that the “quarter was a home run.”
The company’s third-quarter sales rose 2 percent to $4.82 billion, surpassing the $4.73 billion mark set in the same quarter last year. However, sales fell short of analysts’ projections of $4.87 billion, partly because product revenue dropped 0.3 percent to $3.99 billion.
Despite the sales shortfall, Cisco’s results were good enough to drive some Asian markets up and certainly signaled a turnaround for the company, which has seen its stock fall 66 percent over the course of the last year.
The company previously had failed to realize an increase in sales for five consecutive quarters. As a result, it was forced to take drastic cost-cutting measures and lay off thousands of employees.
No Winner Yet
Even with a clearly positive third quarter under its belt, analysts warned that Cisco’s woes are not over and that the industry on the whole needs to see additional positive signs before recovery can be declared.
“A lot of the evidence points to the telecommunications industry not starting to recover until 2003,” Giga Information Group analyst Lisa Pierce told the E-Commerce Times. “Cisco by itself cannot raise the tide.”
In its latest SEC filings, Cisco also said it will spend $15 million by July to buy the rest of a company in which it previously has invested, although it failed to name the company. The filing noted that although Cisco cannot state a final price yet, the purchase could account for as much as $2.5 billion worth of Cisco shares.