Telecom downturn weighs heavy on Cisco
Published: 19 Dec 2000 12:17 GMT
Cisco Systems' stock price hit a 52-week low Monday amid ongoing concerns of an industry-wide slowdown of telecommunications equipment sales.
Cisco's shares fell $5.30 to $42.88 Monday, the fifth straight day the company's stock has dropped. Overall, the networking giant's share price has been sliced in half since its 52-week high of $82 in late March, despite Cisco executives' recent predictions of good financial results for the current second quarter and the rest of the fiscal year.
Wall Street analysts say Cisco has been hit hard by the recent disclosure in a Securities Exchange Commission filing that the company set aside $275m in a contingency account for possible losses during the first quarter that ended 28 October, up from $75m for the first quarter the previous year.
Most analysts say Cisco's decision to up its contingency reserves is not a sign that the company is taking huge financial risks. But they have tied the sum to the ongoing inability for struggling telecommunications service providers to pay their bills. That has been a concern for investors lately, after Cisco competitor Lucent Technologies disclosed two months ago that bad loans to start-up service providers had hurt its quarterly sales.
"As Cisco increases its share in the important service provider market, we would not be surprised to see its doubtful account allowance increase modestly," said Merrill Lynch analyst Michael Ching, in a recent report. "However, we would also expect Cisco to manage the increased risk in a manner consistent with its superior financial execution."
Morgan Stanley Dean Witter analyst Chris Stix agreed. "We do not view this as a signal that Cisco is seeing increased payment risk," he said in a recent report.
Cisco representatives say the reserve is for minority investments, inventory and accounts receivables, a small percentage of which includes customer's inability to pay their bills. Cisco representatives downplayed the increase in reserves, saying it was raised proportionally to the increase in its volume of business. Wall Street analysts blame Cisco's recent stock drop on investors who are fearful of a predicted slowdown in equipment sales to telecommunications service providers and on the increasing number of struggling start-up service providers that could hurt Cisco's results in the future.
Cisco has said it has taken a conservative approach by accounting for bills potentially going unpaid, nullifying the impact of such expenses to the bottom line.
Both Cisco and executives at competitor Nortel Networks have maintained that Lucent's problems with bad loans are isolated.
In October, Lucent announced it increased its short-term reserves for accounts receivables--such as unpaid customer bills -- from $318m last year to $501m, while Nortel raised its short-term reserves from $319m last year to $400m this year for the third quarter that ended 30 September, and its long-term reserves from $284m to $310m.
Cisco, Lucent and Nortel representatives said they have separate reserves for potential bad loans to emerging service providers.
Some emerging service providers, such as PSINet, ICG Communications and Covad Communications, have been struggling financially, leading Wall Street analysts to predict a slowdown in sales of telecommunications equipment.
News.com's Ben Heskett contributed to this report.
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