RealTime IT News

Investors Must Believe Their Own Eyes

It's almost become a mantra for Internet companies trying to put a spin on bad news: Yes, it was a weak quarter, and the next one or two also should be soft. After that, well, we just don't have any "visibility."

Of course, when shares were soaring and the economy was cranking, 20/20 clarity practically was a commodity. Internet executives could peer one, two, even five years down the road and blithely predict even more robust revenue growth and continued (or eventual) profitability.

Cisco Systems tried a slightly different approach in releasing its disappointing second-quarter earnings after the market closed Tuesday. While explaining the numerous factors behind the networking equipment giant's failure to even meet street estimates for the first time in more than three years, CEO John Chambers assured analysts and investors that the downturn now darkening the economic landscape should extend no more than a quarter or two. After that, assuming some help in the form of more interest-rate reductions and federal tax cuts, the sun should shine again.

I'd have more faith in Chambers' current prognostication skills if I didn't remember that as recently as November, Cisco had increased its sales forecasts for Q2 and the 2001 fiscal year. Back then, the company said it expected sequential quarterly revenue growth to reach single or low double digits for Q2, with fiscal year revenue growth forecast between 50% and 60%. In December, Chambers held firm to those predictions.

On Tuesday, however, Cisco said it expects up to a 5% decline in growth for the third quarter, no growth in Q4, and fiscal revenue growth to hit only 40%.

Cisco remains the most powerful (if increasingly challenged) Internet-related company in the world, and despite missing forecasts, it still posted earnings of $1.3 billion, or 18 cents per share, on revenues of $6.75 billion.

Still, it's now clear that even Cisco is not immune to economic forces buffeting the Internet and high-tech sectors - and to be fair, Chambers hinted as much last month when he said Q2 would be "challenging" for the company.

The lesson for investors is that they must rely not on the cheery or fuzzy prognostications of Internet CEOs, but on the cold, hard numbers that tell us where the economy is headed. Everything else is just spin.