Can Cisco and Dell save tech?

[notiCIas]

Can Cisco and Dell save tech?

Recovery or slump? Results from these bellwethers will give clues about the state of tech spending.

May 9, 2005: 6:37 PM EDT
By Paul R. La Monica, CNN/Money senior writer


NEW YORK (CNN/Money) – Are businesses starting to rediscover their appetite for technology?

Cisco and Dell will help answer that question when they report their latest results.

Cisco, the largest maker of Internet and computer network gear, is due to report results next Tuesday while Dell, the No. 1 maker of personal computers, will weigh in next Thursday.

Strong numbers from Cisco (Research) and Dell (Research) could propel the tech sector out of its slump. The Nasdaq has fallen about 2 percent since the start of April, despite some promising earnings reports, and is down 10 percent this year, in large part due to concerns about a sluggish economy and the impact that will have on corporate spending on technology.

Both companies disappointed investors when they last reported in February. Cisco's sales missed forecasts and the company's revenue guidance was below what the Street was expecting. Dell's revenues were a hair below Wall Street's projections, as was its revenue guidance for the second quarter.

Have conditions improved or will this be a long year for tech? Here's what Wall Street will be keeping an eye on when the bellwethers report.

Channeling Chambers
Cisco is expected to report earnings of 22 cents a share for its fiscal third quarter, a healthy 16 percent gain from last year, and revenues of $6.16 billion, up 9.5 percent from a year ago. Wall Street, as always, will be hoping for a little more.

Investors are particularly hopeful that Cisco can return to its days as a company that can be depended upon to post-better-than expected earnings. The company merely matched consensus earnings estimates when it reported its first-quarter results in November and did so again with second-quarter profits in February.

And while these numbers are important, Wall Street will pay particularly close attention to what Cisco's CEO John Chambers says about corporate tech demand. Chambers is kind of the tech equivalent of Alan Greenspan: his statements are scrutinized for clues about the overall state of the industry.

In February, Chambers said he was "cautiously optimistic" about his company's prospects but added he probably wouldn't know how strong demand would be this year until Cisco's fourth quarter.

But another guarded outlook from Chambers probably would make Wall Street nervous, especially since there have been some hopeful signs about the health of the market for network equipment lately.

Cisco rival Juniper Networks (Research) issued strong sales and earnings guidance for its second quarter last month. And according to the latest U.S. tech spending survey from CIO Magazine, chief investment officers of U.S. businesses now expect tech spending to grow 7.9 percent over the next 12 months, up from a forecast of 6.4 percent a month ago.

What's more, respondents polled were particularly bullish about the prospects for increased spending on network gear. So a miss, or tame fourth quarter sales guidance from Cisco, would be a setback, to say the least. Analysts currently expect Cisco to report revenues of $6.5 billion for the period that ends in July, up 10 percent from last year.

Will Dell delight?
Meanwhile, Dell's first-quarter results should be nothing short of spectacular. Profits are expected to come in at 37 cents a share, up 32 percent from last year. Analysts are forecasting sales of $13.4 billion, a 16 percent increase from a year ago.

But recent data from tech research firm Gartner, which showed that Dell and No. 2 PC maker Hewlett-Packard (Research) both posted solid gains in PC shipments in the first quarter, has raised hopes that Dell's numbers could be even better.

In addition, two other PC-centric companies, Intel (Research) and Microsoft (Research), both reported positive first quarter results and issued fairly bullish guidance for the second quarter, thanks in large part due to expectations of healthy demand for PCs.

Dell management probably won't talk about the macro-economic environment. The company usually prefers to say that as long as it keeps costs down and wins market share from competitors, it can do well regardless of what's happening in the rest of tech.

With that in mind, Dell did say in February that it expected to benefit from continued problems facing some of its top rivals.

HP has a new CEO and has struggled to make money from its PC business. IBM (Research) warned of slowing demand last month and announced a round of job cuts, mostly in Europe, on Wednesday. Big Blue also recently sold its PC division to Lenovo Group.

Other competitors, including Gateway (Research) and Sun Microsystems (Research), have also been struggling lately.

So the pressure will be on Dell to give a strong outlook for its second quarter, which ends in July, to convince investors that it's taking advantage of the turmoil in the hardware business.

The current consensus earnings estimate for the second quarter is 38 cents a share, a 23 percent increase from a year ago. Sales are forecast at $13.6 billion, up 16.5 percent form last year.