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Cisco Systems Beats Sanford C. Berstein's Earning Estimates by $230 million ..... EMC Sees a Firming of Corporate IT Budgets

Ed Wijaranakula, Ph.D.
Director of Market Analysis, Infotix Systems, Inc. -  May 12, 2001

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For the week ending May 11, the NASDAQ closed at 2107.43, down 84.1 points or 3.84 percent from the previous week's closing of 2191.53. The fear that the Federal Reserve will not

aggressively cut the interest rate at the next Federal Open Market Committee (FOMC) meeting on May 15, returned to Wall Street as both April's retail sales and the preliminary May reading of the University of Michigan consumer sentiment were higher than the numbers forecasted by Wall Street experts. An improvement in May's consumer sentiment is, however, in agreement with our forecast using the NASDAQ investor sentiment model. We are expecting to see a continued improvement in consumer sentiment in the following month as the NASDAQ market sentiment continues to rise.

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"Consumers are shopping and inventory is declining... If the trend continues, the Fed might have to raise the rate again by the end of the year", said the Wall Street expert. Throughout the week, hedge fund managers were trying to take the technology market down as observed from the pattern of early sell-offs during intra-day trading. The volume was light as institutional and main-street investors stay on the sidelines and wait for the Federal Reserve's decision on the interest rate. There are a lot of negativities on the street as Cisco Systems [ NASDAQ: CSCO] announced its weak third-quarter revenue at $4.73 billion, 3 percent below its revenue reported during the year-ago quarter of $4.9 billion. Excluding one-time charges, the company said it earned 3 cents per share which beat Sanford Berstein's earning estimates by $230 million. Prior to Cisco's earnings announcement, analyst Paul Sagawa at Sanford Berstein forecasted a break-even Cisco report. "We do see a number of positive indications that could result in a bottom in our segment of the industry being reached for capital spending in the next one-to-two quarters," said John Chambers, Cisco's chief executive. Mr. Chambers expects that the company's revenue in the fiscal fourth-quarter could decline further to between 17 and 25 percent below the year-ago fourth quarter level as Cisco sees improvement in its enterprise business and non-telecom market to occur later this year. Mr. Chambers, however, maintains his company's prediction that revenue growth will increase to between 30 and 50 percent a year as the economy returns to a healthy level.  Mr. Chambers' opinion that information technology (IT) spending could reach the bottom in the next one-to-two quarters is not alone. Last Wednesday, EMC [NYSE:EMC], the No. 1 data-storage firm, said that the company is seeing a firming of IT budgets throughout the United States and confirms its forecast for more than 20 percent revenue growth this year.   Intel' s executives recently told analysts that the company has seen trends showing the demand for both personal computers and servers to reach or to be near the bottom. From our viewpoint, there are several positive signs indicating that Cisco's share price could move up higher near-term. One of the indicators is that Cisco reported earnings that beat consensus estimates. If the trend continues, Wall Street's analysts are forced to revise Cisco's earnings upward. Second, Cisco's investor sentiment has shown to reach the bottom and is now on the up-trend. From the arguments that the company has already announced most of the negative news and that IT spending is expected to show signs of improvement soon, we don't anticipate that the company will make any announcement that causes deterioration in investor sentiment.