Cisco Shares Dive on Economy Worries, Downgrade

Shares of Cisco Systems fell 5 percent on Wednesday after CEO John Chambers told Reuters many of his customers see the economy picking up early next year rather than later this year.

AP

In the interview on Tuesday, Chambers also said the office of the chief executive will transform over time to be less hierarchical and more collaborative, prompting some investors to wonder if Silicon Valley's longest-serving CEO could be mapping out his departure.

"The thing that people were probably focused on today was ... the outlook and then secondly how long is he staying as CEO," said Jefferies analyst Bill Choi.

Cisco shares fell as low as $21.72, their lowest level on the Nasdaq since September 2006. The stock was down 4.72 percent at $21.80 in afternoon trading.

Two brokerages cut their price targets on Cisco shares on Wednesday: RBC cut its to $27 from $29, and UBS cut its to $25.50 from $27.

"Our mid-quarter checks on Cisco suggest that Enterprise spending remains challenging and there has been further slowing in the U.S., especially in the West Coast region," UBS analyst Nikos Theodosopoulos wrote in a research note.

In late May, Chambers had said that based on his conversations with customers and economic leaders, the most likely scenario would be for the economy to start picking up toward the end of this year.

In the interview Chambers said, "Most customers still see the turn probably late this year or early next year. More of them looking toward early next year."

The CEO declined to give his own prediction on when the economy would recover, and added that he had no updates on Cisco's business.

JP Morgan analyst Ehud Gelblum found Chambers' remarks to be "punctuating our dour outlook and indicating no improvement in the near term."

While Gelblum maintained a "neutral" rating on the shares, he lowered his estimate for Cisco's revenue growth for the first half of fiscal 2009 to 9 percent from 11 percent.

Succession Questions

Chambers, 58, rarely talks about future leadership at Cisco. He committed last year to another three to five years at the company.

"In terms of how we evolve our entire leadership team, including the office of the CEO, it's very likely to be different five years from now than it was five years ago," Chambers, who is also Cisco's chairman, told Reuters.

"There will probably be a title of CEO, but the next CEO will probably be more a leader of a council than a 'command and control'," he said.

Many analysts say Cisco has a deep bench of executive talent but few have been identified as strong CEO candidates.

Cisco is scheduled to report its fiscal fourth quarter earnings on Aug. 5. Wall Street is looking for profit before special items of $2.34 billion, or 39 cents per share, which would be a 3 percent increase from a year earlier, according to Reuters Estimates.

Jefferies' Choi said that even with the concerns over a weaker economy, Cisco could perform well.

"You could still have the case where in a slower economy, maybe some of the budgets get spent on Cisco versus their competitors or other gear," Choi said.

Copyright 2008 Reuters. Click for restrictions.