Cisco's Dismal Outlook Stuns Street, Hits Sector

Thursday, 11 Nov 2010 07:28 AM

 

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Cisco Systems Inc. gave a dismal revenue outlook, stunning investors who had hoped for proof of a recovery in technology spending, and sending major tech stocks falling.

Forecasts for quarterly and yearly revenue fell far short of Wall Street's expectations, a big disappointment for a company known for solid management and seen as a top beneficiary of the surge in global wireless and Internet traffic. Cisco shares tumbled 13 percent after-hours.

John Chambers, one of the longest-serving CEOs in Silicon Valley whose views on economic trends are well regarded, cautioned of "short-term challenges" in Europe and public sector spending, as well as weakness among its most important customer segment: service providers.

"First of all, our view on this guidance is, we are disappointed," he said.

"We are obviously not projecting growth as fast as we would like over the next several quarters," Chambers told analysts on a conference call.

The world's top manufacturer of routers and switches forecast revenue growth of 9-12 percent in fiscal 2011, well below the 13.1 percent analysts had expected on average.

A projection for 3-5 percent revenue growth in the fiscal second quarter — the current period — also fell far short of Wall Street's expectations for 13 percent.

The shaky outlook, at a time investors had held out hope that the worst of the tech-sector downturn was behind them, sent shares in fellow industry heavyweights down in extended trading. Shares in Microsoft Corp., IBM, Oracle Corp. and Intel Corp. all fell around 1 percent to 2 percent.

Cisco is one of the technology sector's prime bellwethers due to its broad, global operations. And its fiscal first quarter runs through late October, later than many peers, offering a more up-to-date indicator of industry trends.

But analysts were uncertain whether weak guidance, which Chambers blamed on slow orders from public sector clients and service providers as well as weakness in Europe, necessarily meant conditions for its technology peers and rivals had similarly worsened.

"The question is, given the very weak guidance, whether this is very company-specific or whether this is macro, environmental. We're just not seeing this kind of weakness at any other company," said Jefferies & Co. analyst William Choi.

Cisco may be an exception because of its high exposure to public sector clients, many of whom are worried about debt. He also said earlier supply shortages in the technology sector may have generated double orders that were later canceled.

"They're a well run company, well respected — they typically set guidance and meet. For them to guide down like this is puzzling," said Choi.

WORSE THAN IMAGINED

Cisco forecast second-quarter earnings excluding items of 32-35 cents per share, far short of the market's expectation for 42 cents.

"It's worse than we imagined. I'd say we were certainly on the nervous side going into it, but this is not something we were anticipating," said Morgan Keegan & Co. analyst Simon Leopold.

Yet it wouldn't be the first time its outlook and CEO's comments spooked the market. Chambers' warning last quarter about "unusual uncertainty" among customers also sparked a selloff.

Analysts say Chambers' recent caution may be a sign that Cisco's customers were much more cautious about spending than previously thought.

Revenue in the fiscal first quarter ended Oct. 30, rose 19 percent from a year earlier to $10.75 billion, roughly in line with the market's average forecast. But orders in the quarter, an indicator of sales in the coming quarters, were lower than initial estimates by over $500 million, Chambers said.

Quarterly net profit rose to $1.9 billion, or 34 cents a share, from $1.8 billion, or 30 cents a share, a year earlier. Excluding items, earnings per share rose to 42 cents, beating Wall Street's expectations by 2 cents.

Some analysts speculated that customers may be trying to control spending, and said that while gross margin in the first quarter was solid at 64.3 percent, it could decrease in coming quarters as Cisco cuts prices to drive sales volume.

JP Morgan analyst Rod Hall said Cisco's second-quarter operating margin outlook of 23-25 percent was lower than his forecast for 27.2 percent.

Chambers described the recent weakness as an "air pocket" that was likely short term, adding that the company would eventually get back on track to achieve its long-term target of 12-17 percent annual revenue growth.

Morgan Keegan's Leopold said that Cisco, whose products support the massive growth in global Internet and wireless traffic, was still a sound investment in the long run.

"If we look at the basic drivers, the traffic growth, and you look at the general trends of how the network is evolving, it's still sound," he said.

"I don't know if air pocket is the right word. But I think that this is an issue they can recover from."

Shares of the company crumbled to $21.40 in after-hours trade. They had gained around 20 percent since hitting a year's low at the end of August, as the tech sector rallied on hopes of a recovery in spending.

© 2014 Thomson/Reuters. All rights reserved.

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