Cisco says hurt by weak banks; shares dive

Cisco Systems CEO John Chambers said that his company was hit by dramatic decreases in orders from U.S. banks, triggering concerns about its growth prospects and sending its shares plunging.

His comments sounded markedly more cautious than in previous quarters, when the chief executive said the global economy was stronger than he had ever seen, analysts said. Investors, used to Cisco turning bullish each quarter, were also disappointed that it merely reiterated its full-year outlook.

Cisco shares, which had already fallen nearly 4 percent on the Nasdaq, fell another 7 percent in after-hours trading, wiping out a total of about $26 billion in market value.

Fears of weak demand for network equipment from U.S. banks and retailers overshadowed Cisco's solid quarterly results, which were largely in line with Wall Street forecasts.

"A lot of people are very nervous about the U.S. enterprise spending slowing down and bleeding into other segments of the markets in the U.S. and abroad," said Jefferies & Co. analyst Bill Choi. 

Chambers told analysts on a conference call that orders fell from U.S. financial institutions and auto companies, and he expected demand from the U.S. enterprise segment--including banks and retailers--to remain lumpy for a while.

"The U.S. enterprise, probably as a surprise to no one, is experiencing some softness," he said.

Stifel Nicolaus & Co. analyst Sanjiv Wadhwani said, "He was very explicit...I wouldn't be surprised if the weak environment continues." 

Cisco, the top maker of routers, switches, and other equipment, said its fiscal first-quarter profit rose 37 percent to $2.2 billion, or 35 cents per share, from $1.6 billion, or 26 cents per share, in the same period a year earlier. 

Revenue, helped by Cisco's expansion into new products as well as emerging markets, rose 16.7 percent to $9.6 billion for the quarter ended October 27. The company's August forecast was for revenue of $9.45 billion to $9.55 billion. 

While Chambers said he was still optimistic about growth in emerging markets, he reiterated the company's forecast for revenue to grow 13 percent to 16 percent in fiscal 2008, disappointing some investors who had hoped for an increase.

Long-term prospects

Despite the day's heavy losses, however, Cisco shares are still up 9 percent from the start of the year, outperforming rival network equipment makers like Alcatel-Lucent, which has warned of weak North American demand.

Some analysts were positive about Cisco's long-term prospects, saying the U.S. enterprise segment only accounts for about 13 percent of its total business. It has also been expanding its overseas business, investing aggressively in fast-growing markets like China and India.

Orders from emerging markets grew about 35 percent year-on-year in the first quarter, Cisco said. And while demand from U.S. enterprise customers slowed, orders from U.S. service providers grew over 20 percent.

"I think they're one of the best-positioned of the large-cap technology companies," said Keith Maher, vice president and senior investment analyst at BB&T Asset Management. "They're going to benefit from the rollout of IP (Internet protocol) communications."

Many of the network upgrades by top telecommunications companies involve equipment made by Cisco. Analysts have said telecoms and cable service providers are likely to keep buying more Cisco products to keep up with growing Internet traffic, due in part to the popularity of Web-based video and music services.