Enterprise Hardware Outlook Mixed: A Look At Key Earnings Calls

by: William Trent, CFA

I recently looked at some of the enterprise software calls to get a check on tech spending. Today I take a look at hardware. The big (and most recent) news came from Cisco (NASDAQ:CSCO):

Our balanced product momentum across our core technologies and advanced technologies continues to be the best I have seen in a number of quarters...

Let me approach it from a broad perspective. First is what we are seeing is the importance of balance on a global basis. I have been in this business for 30 years -- Jim, I think you have been there that long or maybe a hair longer. It's the strongest global economy I have been a part of.

(Excerpt from full CSCO conference call transcript)

It was funny that nobody challenged him on this, as anyone who has been in the business for long must surely remember Chambers' comments in 2000. According to a CIO Magazine case study called "What Went Wrong at Cisco:"

Xilinx's Wall Street warning came two months before Cisco Chief Strategy Officer Mike Volpi told The Wall Street Journal in November, "We haven't seen any sign of a slowdown." Volpi told The Journal that Cisco hadn't changed its internal plans since the beginning of its fiscal year in August. "We have guided [Wall Street] accurately, and we can execute to plan."

On Dec. 4, CEO Chambers crowed to analysts, "I have never been more optimistic about the future of our industry as a whole or of Cisco."
Eleven days later, CIO Solvik says, the company saw the problem for the first time.

In case you were wondering, Xilinx (NASDAQ:XLNX) lowered its guidance in June, then missed the lower estimate. However, they didn't pin the blame on Cisco. On their call, they said:

During last quarters' call, we forecasted that all geographies extension plan would be up sequentially. Japan was down sequentially as planned, but so was Europe, which turned out to be surprise. This quarter our top 10 European accounts, which represent 45% of total European sales were up 16%, but the main remaining channel accounts were down 19%. The weakness was mainly in the distribution channel across a few end markets including industrial, audio and video broadcast and data processing.

(Excerpt from full XLNX conference call transcript)

Turning to some other companies, EMC (EMC) is certainly having no trouble.

Looking quickly at the IT spending outlook for 2007, we see a positive environment in all major geographies and we believe there is opportunity for us to beat our annual financial targets for revenue, earnings per share and cash flow. EMC's positive results and momentum are obviously only possible because customers are embracing our strategy, our leading products, our services and our solution sets at each of our four businesses -- storage, content management and archiving, RSA security and VMware.

(Excerpt from full EMC conference call transcript)

Other tech companies aren't so lucky. Sun (NASDAQ:SUNW) said:

Sun's total revenues for the fourth quarter of fiscal year 2007 were $3.835 billion, an increase of 0.2% as compared with $3.828 billion in revenue reported for the fourth quarter of fiscal year 2006.

(Excerpt from full SUNW conference call transcript)

The largest technology distributor, Ingram Micro (NYSE:IM) had a mixed quarter - overall sales were reasonably strong but currency fluctuations played a big role:

On a regional basis, North America sales where $3.3 billion, essentially, flat versus the prior year or 40% of total revenues. As we described at last quarter warranty sales on behalf of our vendors are now recognized as net fees rather than gross revenues in cost of sales as reported in the prior year period. We saw a negative impact on year-over-year sales comparisons of approximately 5%. European sales were $2.78 billion or 34% of total revenues, an increase of 16% versus a year ago. The translation impact of relatively strong European currencies contributed an 8 percentage point positive impact on comparisons to the prior year.

Asia pacific sales were $1.76 billion, an increase of 31% over the prior year and 22% of our total sales. Finally Latin America sales were up 4% versus last year to $344 million representing 4% of our total sales.

(Excerpt from full IM conference call transcript)

Much like the software conference calls, the outlook appears reasonably positive. However, I'm not ready to break out the champagne and say we're past the tech spending doldrums. Results are mixed, the financial sector is very important to tech spending, and Cisco's forecasting track record doesn't help my confidence level. While I'd love to see tech spending improve, I'll have to see it to believe it.