Cisco Raises Doubts About Recovery's Strength

Technology spending appears to be faltering, judging from cautious comments, rising inventories and a weaker-than-expected sales outlook at Cisco Systems Inc. (CSCO) as well as bad news from other technology companies.

Cisco, the world's largest maker of equipment that directs Internet traffic, late Tuesday posted a record quarterly profit on strong sales, but investors fretted about Chief Executive John Chambers (search)' comments about customer caution.

Shares of Cisco were off almost 10 percent in heavy morning trading Wednesday, while the Americaorp., a maker of analog semiconductors, reversed its previous outlook by forecasting that sales in its current quarter would fall on lower-than-expected demand.

Chip equipment maker Kulicke & Soffa Industries Inc. (KLIC) warned that sales in its current quarter would fall short of its prior forecast by as much as 31 percent, citing growing customer caution.

The Philadelphia Stock Exchange semiconductor index (search) fell 6.3 percent, while the Nasdaq 100 index was off 2.4 percent in morning trading. Both the Standard & Poor's 500 index and the Dow Jones industrial average were off slightly.

"It was not just Cisco. National Semi preannounced weakness in handsets. We saw in the last month or two, software companies preannounced earnings shortfalls. Generally guidance from a lot of companies are more cautious into the third quarter," said Bear Stearns analyst Wojtek Uzdelewicz.

"There is a major deceleration in technology spending, although (the growth is) still healthy," he added.

Last month, International Business Machines Corp., the world's largest computer company, said the recovery was spotty but on track; Intel Corp., the world's largest chip maker, cut its profit margin forecasts and said inventories rose 15 percent; and Microsoft Corp., the world's largest software maker, offered a weaker-than-expected profit outlook for its current fiscal year.

Cisco Tuesday said profit surged 41 percent and sales rose 26 percent. However, the San Jose, California-based company also said sales in the current quarter would be flat to up 2 percent from the prior quarter, below analysts' expectations.

"The recovery in spending we thought we were seeing early signs of might not come to fruition," J.P. Morgan analyst Ehud Gelblum said in a research note.

Chambers also raised red flags for some investors with his cautious comments.

"Most of the CEOs that I talk with view the economy as growing at a modest level and are a little more cautious ... than they were a quarter ago," he said on a conference call with analysts.

Cisco also said its inventories rose 9 percent from the previous quarter, more than Wall Street had been expecting. Company officials said they were not concerned, but a rise in inventories was one of the first signs of trouble before the telecom bubble burst in 2001. Cisco took a $2.2 billion charge in 2001 to write off excess inventory.

Investors see Cisco as a benchmark for corporate and government spending because about 75 percent of its revenue comes from those customers. The rest comes from the telecom sector.

Shares of Cisco fell almost 11 percent in early trading and were still off $1.98, or 9.7 percent, at $18.48 on the Nasdaq in late morning. The percentage drop was the stock's biggest in nearly two years.

Shares of the major contract manufacturers were broadly lower, in particular Solectron Corp., Jabil Circuit Inc. and Celestica Inc., all of whom count Cisco as a major customer.