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Cisco: Economic Troubles Aren't Over

Cisco Systems Inc. (Nasdaq: CSCO) is still getting a yellow light from the U.S. economy, CEO John Chambers said today, as the company conceded that its weakened rate of growth will continue for the rest of this calendar year.

Cisco reported quarterly revenues that crossed the $10 billion mark for the first time in the company's history. (See Cisco Reports Q4.) But its long-term growth target of 12 percent to 17 percent per year -- to which Chambers is sticking doggedly -- will have to wait out at least two more quarters of relative weakness.

"Our best estimate... is that the current economic challenges will remain with us for the next few quarters," Chambers said on a conference call with analysts this afternoon.

Specifically, Cisco expects revenues for its fiscal first quarter -- which ends in October -- to be just 8 percent higher than the previous year's. That's a $10.32 billion target, versus the $10.39 billion analysts were expecting.

Likewise, second-quarter revenues will be just 8.5 percent higher than the previous year's.

Cisco usually gives some full-year predictions when its fourth fiscal quarter wraps up, but citing the unpredictable economy, Chambers gave a forecast for just the next two quarters.

Analysts' predictions for the next few quarters were muted already. That's because in February, Cisco began warning about lowered customer spending, saying it was an effect of the weakened U.S. economy. (See Cisco Sounds Warning Bells and Cisco's 'First Inning'.)

At the time, Chambers said the effect would last for at least several months. In May, he said it was still looking like a short-term thing. (See Cisco's Q3 Hits the Flats.)

Now, he's admitted it's not going away any time soon.

Still, Chambers stressed that Cisco doesn't expect the tough economy to be a long-term problem and noted that the company will continue to invest aggressively.

Cisco's stock was up 85 cents (3.8%) to $23.50 per share in after-hours trading at press time.

It's important to note Cisco has never said growth would stop, just that it would be slower than Cisco (and Wall Street) would like. During the fourth quarter, sales into U.S. enterprises -- the primary problem spot Cisco identified back in February -- were up 13 percent from the previous year.

During the third quarter, which ended in April, Cisco's U.S. enterprise sales were 6 percent higher than a year earlier.

Separately, Chambers noted that Cisco's book-to-bill ratio during the fourth quarter was "comfortably above one," a sign that orders are at least growing.

For its fourth quarter, which ended July 26, Cisco reported revenues of $10.4 billion and net income of $2 billion, or 33 cents per diluted share, compared with the previous quarter's revenue of $9.8 billion and net income of $1.8 billion, or 29 cents per share.

For its fourth quarter a year ago, Cisco reported revenues of $9.4 billion and net income of $1.9 billion (31 cents per share).

— Craig Matsumoto, West Coast Editor, Light Reading

Pete Baldwin 12/5/2012 | 3:35:10 PM
re: Cisco: Economic Troubles Aren't Over U.S. Enterprise for Q4 was up 13% over last year, but service provider was up just 5%. so it's like the trouble spot shifted.

Still, the 13% is pretty good. But during the Q&A part, Chambers said it's too early to say whether the U.S. enterprise troubles are over.

Also -- Chambers got asked about acquisitions, gave the usual noncommittal answer. But he did say any buys were more likely to be around the size of a Sci-Atlanta or a WebEx, not something big (the question seemed to be alluding to the EMC rumor of last week:

http://www.lightreading.com/bo...
Pete Baldwin 12/5/2012 | 3:35:10 PM
re: Cisco: Economic Troubles Aren't Over Oh, and I forgot to mention in the story: Cisco's earnings per share beat estimates by a penny. Like that's a surprise.
bollocks187 12/5/2012 | 3:35:08 PM
re: Cisco: Economic Troubles Aren't Over Who really cares unless you own the stock.

Cisco has become such a technology killer.
grunt 12/5/2012 | 3:35:05 PM
re: Cisco: Economic Troubles Aren't Over I cared - because it is a direct indicator of the market and the economy. Seemed like good news to me - record Q, strong international, and enterprises who led the slow-down starting to increase orders...

Your comment about technolgy killer -- well seems to me they do alright innovation wise for a 66k person, $40B a year company - I think larger companies naturally have trouble continuing to innovate at the pace some startups try to - its a human nature organizational issue - nasty stuff.
grunt 12/5/2012 | 3:35:05 PM
re: Cisco: Economic Troubles Aren't Over I cared - because it is a direct indicator of the market and the economy. Seemed like good news to me - record Q, strong international, and enterprises who led the slow-down starting to increase orders...

Your comment about technolgy killer -- well seems to me they do alright innovation wise for a 66k person, $40B a year company - I think larger companies naturally have trouble continuing to innovate at the pace some startups try to - its a human nature organizational issue - nasty stuff.
PrivateCEO 12/5/2012 | 3:34:57 PM
re: Cisco: Economic Troubles Aren't Over Many companies receive venture funding with a hopeful eye towards an acquisition by Cisco. Some realize the dream, others do not. Some are successful in their own right, many fail. But a lot of VCs have made a decision to invest in a start-up with this specific possibility weighing heavily on their decision.

When Cisco does acquire a company it is to fill in a gap in their product lines or to bring unique technology in-house to compliment existing capabilities. Rarely do they buy market share, and I don't know of any case where they bought a company to eliminate a competitor.

That is certainly not killing technology...
marlin_brando 12/5/2012 | 3:34:51 PM
re: Cisco: Economic Troubles Aren't Over There is an old saying " if cisco get cold networking startups gets fever. Cisco being very successful company, there has been a drastic changes within the organization in recent past. I am sure cisco will regain its rhythm.

Startups wait for another sunny day.

--MB
Pete Baldwin 12/5/2012 | 3:32:07 PM
re: Cisco: Economic Troubles Aren't Over Chambers is sticking to a 12-17% long-term target.

http://biz.yahoo.com/rb/080916...

It may be time to nail Chambers down on his definition of "long-term," because next year isn't going to cut it, and the year after would have to be spectacular in order to make up for two mediocre years. Maybe that's what he's banking on, with his talk of "literally wave after wave" of new technologies.

It seems pretty clear Cisco won't clear 12% without a substantial acquisition.
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