Cisco CEO: ‘Never Seen’ Such a Falloff in Orders; Slowdown in China, Emerging Markets Deliver Blow; Shares Tumble

Cisco CEO: ‘Never Seen’ Such a Falloff in Orders

Slowdown in China, Emerging Markets Deliver Blow; Shares Tumble

DON CLARK

Updated Nov. 14, 2013 11:16 p.m. ET

A slowdown in Cisco Systems Inc. CSCO -10.96% ‘s business is turning into a tailspin, hobbled by weak demand in China and other emerging markets. The Silicon Valley network-equipment giant on Wednesday said revenue rose just 1.8% in its first fiscal quarter, compared with its projection of 3% to 5% growth. Cisco followed up by projecting a decline of 8% to 10% in the current period, an unusually grim forecast for a company seen as a bellwether for corporate technology spending. Cisco’s shares fell 10% to $21.58 in after-hours trading following the company’s earnings report late Wednesday.John Chambers, Cisco’s chief executive, said orders the company expected to land in October never materialized, particularly in Brazil, Russia, Mexico, India and China. Orders for all emerging markets declined 21%.

“I’ve never seen this before,” Mr. Chambers said.

The company had previously been having trouble in China, a huge technology market where Cisco faces a tough domestic rival in Huawei Technologies Co. Mr. Chambers acknowledged that recent disclosures about surveillance activities by the U.S. National Security Agency may be adding to the woes facing Cisco and other U.S. companies in China, though the effect seems to be “fairly nominal” in other countries.

“It’s not having a material impact, but it’s causing people to stop and then rethink decisions,” added Rob Lloyd, Cisco’s president of development and sales, during a conference call with analysts.

First-quarter orders in China declined 18%, the company said, with Mexico and India off by the same percentage. Orders were off 30% in Russia and 25% in Brazil.

Mr. Chambers said customers in such countries appeared to be spooked by a series of inconsistent signals about economic conditions, currency fluctuations and other factors.

At the same time, Cisco’s sales to service providers also suffered. The company said sales of video-related equipment to that sector declined 14% to $987 million.

Part of the problem came in sales of TV set-top boxes to customers such as cable operators, Mr. Chambers said. But Cisco also recently delivered a new line of routing equipment that service providers are still evaluating before deploying.

Cisco’s routers and switching gear funnel traffic on corporate campuses and over the Internet, and the company has recently built a fast-growing line of server systems. The company had signaled in August that it expected its business to slow, laying plans to trim about 4,000 jobs, or 5% of its workforce.

Under Mr. Chambers, the company has weathered a series of boom-and-bust cycles, and he expressed confidence the company will once again respond to the current problems by developing new products and regaining market share.

“Cisco comes back every time stronger,” Mr. Chambers said.

Including charges from the workforce cuts, Cisco said its profit for the fiscal period ended Oct. 26 declined 4.6% to $2 billion, or 37 cents a share, down from $2.09 billion, or 39 cents a share, a year earlier. Revenue rose to $12.1 billion from $11.9 billion.

The company, which has big business in selling to government customers, said revenue was also hurt by the recent federal government shutdown by about $50 million.

 

Cisco’s Route Still Isn’t Clear

Company’s Valuation and Big Cash Pile Make It a Tempting Target Following a Brutal Selloff, but Investors Shouldn’t Succumb to Temptation

DAN GALLAGHER

Updated Nov. 14, 2013 9:09 p.m. ET

Cisco Systems CSCO +0.58% may be cheap, but it isn’t necessarily a buy.

A sharp selloff in the stock Thursday following a downbeat earnings report late the previous day appears to present an attractive opportunity. Investors could do better, though, to wait out this particular sale until the risks are better understood.

Not that it isn’t tempting. Cisco now trades at less than 11 times forward earnings, about 10% below its five-year average, according to FactSet. The company generated more than $2.6 billion in cash from operations in its fiscal first quarter ended Oct. 26. That is up 7.5% from the same period last year despite anemic sales growth. Cisco now has cash of more than $48 billion, equal to 42% of its market value.

 

Also, Cisco itself took the rare step in reporting results of issuing an earnings-per-share-forecast for the full fiscal year, which ends July 2014. The midpoint of its range projects flat earnings growth for the year, meaning Cisco has virtually assured investors that it will deploy its considerable financial resources—including a $15 billion buyback announced Wednesday—to prevent a meltdown on the bottom line. And that is despite a questionable outlook for the top line.

Yet it is that revenue outlook that should give investors pause. Cisco itself doesn’t seem to have a complete handle on what’s going on, beyond the fact that between $600 million and $700 million in expected orders seemed to evaporate during the October quarter. Adding to this are continued problems in China, tepid federal government spending and some weakness in its cable set-top box business.

Cisco has recently introduced products such as its Nexus 9000 series of switches that employ new technology based on software defined networking, which is designed to allow enterprises to more effectively manage their networks at a lower cost with less equipment. The new technology is promising, but Cisco’s largest customers need time to evaluate it, and may hold off on planned purchases in the meantime. That could spell further revenue weakness in front of an uncertain payoff, and Cisco’s smaller, more nimble rivals aren’t sitting still either.

It is notable that Cisco’s downbeat outlook came on the same day that Amazon.comAMZN +0.06% hosted its annual AWS re:invent conference in Las Vegas, where AWS head Andy Jassy dinged “old guard technology companies” for being slow to recognize the shift to the cloud.

Cisco wasn’t named, but the company is vulnerable, as companies such as Amazon andGoogle GOOG -0.01% deploy huge cloud-based computing services with gear of their own design. Cisco still sells into growing areas such as wireless markets, but being shut out by cutting-edge Internet giants doesn’t bode well for the future.

Cisco needs to get sales going again, and prove it can catch the wave of cloud-based computing. Until it does, investors are better watching from a safe shore.