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Wednesday, 8 August, 2001, 11:58 GMT 12:58 UK
Cisco falls to earth
Cisco's John Chambers
Mr Chambers admits he doesn't know what will happen
Cisco Systems, once the darling of the technology sector, appears to have fallen to earth in a spectacular fashion.

It revealed on Tuesday that net income fell 99% to $7m for the three months to the end of July. Excluding one-off items, profits fell 86% to $163m.

How Cisco fares is seen as a key indicator of the health of other technology stocks.

It is like we have put on the brakes and we have come to screeching halt

Dr Kenneth Courtis, Goldman Sachs

Analysts believe that these figures - which were broadly in line with expectations - show that it could be some time before the technology sector turns the corner.

Cisco is the leading supplier of network equipment, like switches and routers, to big private companies and telecom firms.

Its technology is seen as the key hardware in the development of the internet and for a brief time last year, it was the most valued company in the world.

End of spend

The global economic slowdown has seen many companies put the brakes on capital spending and this has hit Cisco hard.

Cisco head office, California
Cisco is one of the biggest employers in Silicon Valley

"The problems with Cisco are related to capital spending boom and subsequent bust," Clearview Economics' president Ken Mayland told the BBC's World Business Report.

"When you look at the performance of tech stocks over a long period of time, you tend to find that high tech stocks outperform when capital spending is booming," added Mr Mayland, explaining that a slowdown in capital spending will then have the opposite effect.

This slowdown in spending is likely to continue well into next year.

Even Cisco chief executive John Chambers admits that no one really knows when the economy and capital spending will bottom out.

While there are signs that the situation in the US is improving, the situation in Asia and Europe could get worse before it gets better.

Clearview Economics' Mr Mayland said: "A lot of people looking for leadership out of Cisco and companies of its ilk are likely to be disappointed."

Screeching halt

What happens to Cisco mirrors what is happening elsewhere in the technology industry.

"It is like we have put on the brakes and we have come to screeching halt and some of the passengers have been thrown through the windscreen," is how Dr Kenneth Courtis, vice chairman, Asia, at Goldman Sachs, described the technology crisis to the BBC's World Business Report programme.

"Expectations have been lowered dramatically from where they were a year ago... Profits are just getting laminated."

Cisco is not the US economy and it is not the US stock market

Ken Mayland, Clearview Economics
But he took reassurance from the fact that shares in Cisco didn't fall significantly in after-hours trading on the Nasdaq.

His view is that other factors contributed to the fall of stocks overnight.

"The exporters from Asia, many of them high-tech exporters, are seeing their orders melt, and those they can sell, are selling at lower prices," he said.

Merrill Lynch cut its earnings forecast for the company but did however maintain its long-term buy rating on the stock.

"We continue to believe that Cisco will be among the first companies to emerge once the markets recover," the investment bank said.

US economy?

Whether Cisco's earnings can be seen as an indicator for the rest of the US economy is unclear.

"I would agree that Cisco is a bellwether for the tech sector... I don't think it is a bellwether for the US economy," Clearview Economics' Mr Mayland said.

"What you find when you study business cycles is that capital spending tends to lag overall economic trends," he said.

"It is really consumer spending that leads economic trends... Cisco is not the US economy and it is not the US stock market," he added.

Ken Mayland, Clearview Economics
"The problems with Cisco are related to capital spending boom and bust"
Dr Kenneth Courtis, Goldman Sachs
"Expectations have been lowered dramatically from where they were a year ago."
See also:

07 Aug 01 | Business
Cisco profits down 86%
17 Apr 01 | Business
Cisco warns of lower earnings
17 Apr 01 | Business
Q&A: What's gone wrong with Cisco?
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