What Can Save Cisco?

By Eric Jackson02/10/11 - 03:15 PM EST

I participated in TheStreet.com's live blog last night covering Cisco's(CSCO) earnings call. It was a fun event. I particularly enjoyed watching peoples' reactions change as the call got well underway.

When Cisco's earnings report first came out, it looked like a "beat." Consensus called for earnings per share of $0.35 on revenue of $10.3 billion. The company reported earnings of $0.37 per share on revenue of $10.4 billion.

Initial responses from the majority of the live blog's participants -- most of whom appeared to be long the stock -- was positive. Cisco's shares briefly (maybe for about 30 seconds) traded in the green after yesterday's close. However, it didn't take long for the stock to start heading south -- quickly and steadily.

There was no mention of guidance in the initial earnings press release. Earnings season, however, definitely has a "show me" quality to it. The market seems to place even more weight on guidance than it does on whether current-quarter expectations are met (and God help any company that doesn't meet them).

Once revealed, Cisco's guidance was definitely tepid. The company forecasted earnings per share of $0.35 to $0.38 for the coming quarter. Analysts expected the company to guide to $0.40 per share.

Another cause for concern was the continued sag in gross margins, which were down to 62.4%. Wall Street was looking for gross margins of 63.3%.

As I mentioned on the live blog last night: though I have no position in Cisco, I interpreted yesterday's results as a big reason to sell the stock in the afterhours session. Often, if a stock sees a big, earnings-inspired move in afterhours trading, that move (up or down) gets extended further the next day when regular trading resumes. Deserved or not, that's just the way it's gone, whether it's Netflix(NFLX_) on the upside or Cisco here.

Shares of Cisco held above $20 during conference call last night but have been below $20 all day today.

When the call began, I was struck by a couple of things. First, John Chambers wouldn't shut up. He talked for a long time before he passed the ball to the CFO. Then, before taking questions, Chambers came back and talked even longer than he did the first time. The Q&A session didn't start until 50 minutes into the call. I think the endless droning worried analysts. If you keep talking about how everything is fine, it usually means everything's not fine.

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