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Wi-Fi Signs Don't Bode Well for Cisco

Light Reading
News Analysis
Light Reading
5/8/2013
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With surprisingly downbeat outlooks from enterprise Wi-Fi suppliers Aruba Networks Inc. and Ruckus Wireless Inc. in hand, investors are wondering what to expect when Cisco Systems Inc. reports earnings on May 15. While it accounts for only 4 percent of the company's revenues, according to analyst George Notter of Jefferies & Co. Inc., the Wireless business has been contributing disproportionately to Cisco's overall growth. Aruba said Tuesday morning that its third-quarter results will miss expectations in both revenues and earnings. In response, the stock fell 23 percent that day (although it was up $0.85, or 5 percent, at $17.87 in late Wednesday trading). Likewise, Ruckus reported disappointing first-quarter results late Monday while also warning that second-quarter revenues and earnings would come in below current expectations. Its stock dropped by 25 percent the next day. Notter and other analysts say the long-term prospects for enterprise wireless sales are as strong as ever. Wireless's penetration of the corporate market is still quite low -- just 20 percent, reckons Mark Sue of RBC Capital Markets -- so there is plenty of upside. But with federal spending taking a hit due to mandated budget cuts, aka the sequester, and with corporations still keeping a tight rein on spending in all areas of IT, Cisco could be reporting slower-than-expected growth, too. (See Cisco Could Be Hit by Weaker US Govt. Spending and Sequester Could Sock Verizon & AT&T.) "Investors are concerned with the broad-based nature of the declines with weakness highlighted in all the major theaters (Americas, EMEA, APAC)," writes RBC's Sue. The good news, Sue says, is that "wired port growth has already slowed considerably and is being replaced by wireless ports … a trend that we believe will continue." For several weeks, now, Cisco's earnings have been expected to come in at the low end of its forecast of earnings per share of $0.48 to $0.50. In mid-April, analyst Simon Leopold of Raymond James Financial Inc. pointed to weakened government sales as a major contributor to the firm's struggles. Aruba, whose gear lets companies manage their Wi-Fi and wired networks as one, told investors to expect revenues of $144 million to $147 million, well below its earlier guidance of as much as $161 million. Its outlook on earnings per share: just $0.11 or $0.12, versus the $0.20 it had spoken about before. Ruckus said it now expects second-quarter earnings per share of $0.03 to $0.04, versus the $0.04 Wall Street had been forecasting. The company's first-quarter results -- dampened, Ruckus said, by a weak Chinese market and uncertainty over certain service providers' deployments in the Americas -- included sales of $57.2 million and non-GAAP earnings per share of $0.03, in contrast to the Street's consensus estimates of $0.04 and $63.3 million. — John Verity, contributing editor, special to Light Reading

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