Cisco sees ‘unusual uncertainty’, sales disappoint

By : |August 12, 2010 0

NEW YORK, USA: Cisco Systems Inc CEO John Chambers warned of "unusual uncertainty" in the economy and forecast revenue that missed Wall Street targets, sending its shares plummeting and raising fears that a nascent recovery in technology spending could be derailed.

The cautious comments from the man often known as Silicon Valley’s biggest cheerleader disappointed investors who had expected growing Internet traffic would spur stronger sales of Cisco’s network equipment and send a positive signal to the broader technology sector.

"We are seeing a large number of mixed signals in both the market and from our customers’ expectations, and we think the words ‘unusual uncertainty’ are an accurate description of what is occurring," Chambers told analysts on Wednesday, after announcing the financial results.

                                 

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Shares in the networking giant and industry bellwether dived 8 per cent after-hours, weighing on other tech names. Rival Juniper Networks slid 3 per cent in extended trading, while International Business Machines Corp was down over 1 per cent. EMC Corp fell over 2 per cent.

Cisco is expected to depress Wall Street on Thursday, with Standard & Poor’s 500 futures SPc1 down 0.4 per cent and Nasdaq futures NDc1 off 1.2 per cent.

Chambers said orders slowed in late June to early July as worries mounted about debt problems in Europe, but strengthened at the very end of the quarter that ended July 31. He added that he did not expect a double-dip recession.

"He certainly sent investors mixed signals. But overall, it looks like orders ramped up towards the end of the quarter but weren’t strong enough to give the guidance that people were looking for," said Bill Choi, analyst at Jefferies & Co.

Cisco forecast its revenue this quarter would grow 18 per cent to 20 per cent from a year earlier, while the average analyst estimate had been for 21 per cent growth to $10.95 billion.

Revenue in its fiscal fourth quarter ended July 31 was also slightly below expectations at $10.8 billion, above 27 per cent from a year earlier but still slightly below the average analyst forecast of $10.9 billion, according to Thomson Reuters I/B/E/S.

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Always killer

Cisco shares slumped to $21.82 in extended trading after closing 2.4 per cent lower at $23.73. They have fallen nearly 9 per cent so far this year, hurt by worries of slower growth in Europe and China.

Cisco is one of the technology sector’s prime bellwethers due to its broad, global operations. Since Cisco’s latest results are for the full month of July, instead of June for many of its peers, they are also seen as an early indicator of industry trends.

While fourth-quarter earnings, excluding special items, beat expectations by a penny at 43 cents a share, investors have grown accustomed to a bigger beat from the company, of 3 cents to 5 cents in recent quarters.

"The Street always expects them to kill, and they didn’t. And the pause in the middle looks like it affected the results," said Catharine Trebnick, analyst at Avian Securities.

Cisco’s cautious outlook came on the heels of a bleaker assessment of the economy by the U.S. Federal Reserve, which said on Tuesday the pace of recovery had slowed in recent months. Chambers said many customers he had spoken with recently would agree with the central bank.

"There are some challenges that are contributing to an unusual amount of conservatism and even caution," Chambers said.

Analysts said another concern was a decline in gross margin to 64.1 per cent from 65.2 per cent in the previous quarter. The company forecast it would be around 64 per cent in the first quarter, lower than some analysts had expected.

Higher component costs due to supply shortages had hurt margins. Supply conditions were improving, but still challenging, Cisco said.

Some analysts have said profitability could worsen as Cisco enters more competitive markets such as consumer electronics and data center servers.

Now, in addition to industry peers like Juniper Networks Inc, Alcatel-Lucent SA and Huawei Technologies Co Ltd , it competes with a wide range of technology firms like International Business Machines Corp and Hewlett-Packard Co.

Chambers, however, said Cisco had the distinct advantage of a broad product portfolio that includes network equipment as well as software and electronics like the Flip video camera.

"Things we control or influence are in great shape. Our growth in terms of our long-term aspirations looks very good," he said. He reiterated the company’s long-term target of 12 per cent to 17 per cent annual revenue growth.
 
Since Chambers became CEO in 1995, Cisco has grown from a company with $1.2 billion in annual revenue to around $40 billion. Chambers is widely credited with building the company through aggressive sales strategies and a series of acquisitions, including a recent deal for Norwegian videoconference company Tandberg.

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