Wall Street Beat: Cisco Stirs Worry, but Forecasts Solid
Word of slowing growth from Cisco put the brakes on the tech rally in the markets, but Lenovo results and forecasts for the mobile, online and consumer electronics markets suggest that IT's recovery from the recession still has legs.
Cisco put out its quarterly earnings release Wednesday after the market closed, and on Thursday the tech-oriented Nasdaq closed down by 23 points to 2555. The broader Dow index closed down by 73 points, to 11283. Cisco shares closed down by US$3.97 to $20.52, losing about 16 percent of their value as the networking giant dipped near its 52-week low of $19.82.
Shares continued to slide broadly Friday morning, punishing not only Cisco but IT vendors that have had great earnings. An hour after the opening bell on the markets, Cisco shares were down by $0.17 to $20.36. Apple, which recently reported record sales and earnings, was down by $1.64 to $314.98. Microsoft, which recently reported its best September quarter ever, was down $0.17 to $20.36.
On the surface, Cisco had a good quarter, with revenue reaching $10.75 billion, up about 19 percent year on year, while profit increased by 13 percent to $1.9 billion, or $0.34 per share.
But the company also forecast revenue growth of 3 percent to 5 percent for the current quarter and a sales increase between 9 percent and 12 percent for the fiscal year. That is well below the company's oft-repeated target of sales increases between 12 percent and 17 percent. Cisco laid the blame mainly on a slowdown in spending on the part of public administrations. In the U.S., government entities are being hit as stimulus spending dries up.
On Thursday, IDC had some mixed news about worldwide PC microprocessor unit shipments and revenue in the third quarter. Though shipments and revenue increased 8.6 percent and 24.1 percent, respectively, year on year, they increased only 2.1 and 2.5 percent, respectively, from the second quarter this year. The usual increase from second to third quarter is 10.6 percent for shipments and 9 percent for revenue.
Manufacturers appear to be hyper-sensitive to the fragile economy. "OEMs have become very reactive to any hint of slackening end demand," said analyst Shane Rau in a statement.
On a positive note, IDC did issue a positive forecast, saying that though consumer demand for desktop hardware in developed countries will be slack, corporations will spend on personal computer upgrades and, as a result, PC market growth should be in the double digits next year.
China-based PC maker Lenovo, the fourth-largest computer manufacturer in the world, meanwhile announced a strong quarter Wednesday. Profit for the quarter ending Sept. 30 rose 44 percent from a year earlier to $76.59 million, while sales increased 41 percent to $5.76 billion. A Lenovo statement expressed "cautious optimism" about the quarter ahead and said the company is looking for acquisition targets.
Defying concerns about, among other things, fear of a double-dip recession, global PC shipments continued to expand in the third quarter, rising by 7 percent sequentially and by 10.3 percent compared to a year earlier, market research firm iSuppli said recently. Global PC shipments in the quarter hit 88.1 million units, iSuppli said.
"Even with consumer confidence shaken by government austerity measures, individuals and businesses continued to purchase PCs in the third quarter," wrote Matthew Wilkins, a principal analyst for iSuppli. The firm said PC shipments will continue to rise in the fourth quarter, with a mid-single-digit year-over-year increase.
Other market reports this week were positive as well:
-- Global mobile phone sales to end users totaled 417 million units in the third quarter of 2010, a 35 percent year-over-year increase, according to Gartner. Smartphone sales grew 96 percent from the third quarter last year, and smartphones accounted for 19.3 percent of overall mobile phone sales in the third quarter of 2010.
"Smartphone OS providers have entered a period of accelerated platform evolution, stimulated by more regular product releases, new platform entrants and new device types," said analyst Roberta Cozza in a statement. For 2010, Gartner expects overall mobile device sales to increase more than 30 percent year-on-year.
-- Despite Cisco's problems with government spending, CDW's IT Monitor -- a bimonthly indicator from the systems integrator -- found that 86 percent of government IT decision makers surveyed anticipate replacing or installing software in the next six months, an increase of nine percentage points since August 2010 and a record high since the launch of the IT Monitor in December 2007, before the Wall Street crash in September 2008.
-- Forrester projected online holiday sales to hit almost $52 billion in November and December, a 16 percent year-over-year increase. Consumers are showing a willingness to spend this season, according to Forrester. Eighty-seven percent of online buyers with household income of more than $100,000 say they will spend the same or more this year compared to last year, while just 13 percent say they will spend less.
As market-watchers sort out whether Cisco's problems will affect other vendors, confidence on the part of buyers will play a big part in how IT sales, and shares, fare. For most of the third quarter, stocks dipped as concerns about a double-dip recession affected investor confidence. But the IT sector started to lead markets in September, sparking a broad market rally though October as big-name vendors reported strong earnings. Strong fourth quarter sales would go a long way toward keeping confidence high.
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