Chambers’ $5 billion comment


ÏAugust was little above our expectationsÓ is all John Chambers said and bam! The market increased CSCO valuation by $4.6B. How is that for Ïirrational exuberanceÓ? Well there is more to the story than what meets the eye.

First of all any strength in August is positive because August is one of the slowest month for Cisco as itÌs the first month of new fiscal year. Secondly, this strength is coming from small and medium size business and good old Uncle Sam. There might be some budget flushing going on at the Federal Government as agencies try to clean their cookie jars before the fiscal year ends.

Thirdly, IP spending is increasing by Service Providers which is great news for Cisco which dominates IP infrastructure market and validates Cisco as a formidable competitor to old guards: Lucent, Nortel, Siemens, Fujitsu and the likes at the Service Providers. And if you add these three constituents (Small & Medium Size Business, US govt., Service Providers) that makes up about 40-45% of Cisco revenues. So now you know why it is big news when about half of your market is improving, especially in a slow month.

But as evident during last quarter, Cisco is still not seeing growth in its traditional market, the enterprise. It is also not seeing much growth in the router and switching products, both of those have stayed flat or declined as % of revenues and in dollar terms for last four quarters. The growth that it has seen, which is very nominal sequentially and no growth annually, has come from Other category which usually has lower gross margins.

But Chambers & Co. might be indicating that things are turning, especially at Service Providers and that bodes well for the tech market overall.

(The little comment was emailed to us by our occassional writer, also known in house as the Mindless Money Manager.)

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