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Cisco Predicts Q2 Plunge

The storm has arrived.

Cisco Systems Inc. (Nasdaq: CSCO) is preparing $1 billion in expense reductions as the company is forecasting a decrease in revenues for the current quarter, which will end in January.

At the same time, CEO John Chambers, speaking on today's earnings call, laid out Cisco's game plan to prepare for the eventual recovery of the global economy. Chambers continues to tell investors that Cisco has come out of each downturn stronger than before.

Cisco is putting a freeze on hiring, but Chambers made no mention of layoffs.

One key here is that Cisco's first quarter included October, the month when the U.S. economy really slumped. That makes Cisco one of the first technology companies to report what happened in October -- and it wasn't pretty.

In August, Cisco was seeing an order rate 7 percent higher than it had a year earlier. By October, orders were down 9 percent from the previous year.

That means pain. Cisco says its second-quarter revenues will fall 5 to 10 percent compared with a year ago. That's a range of $8.8 billion to $9.3 billion, compared with the $10.3 billion analysts were predicting, according to Reuters Research .

Cisco still clings to a long-term growth figure of 12 percent to 17 percent, presuming the economy eventually returns to normal. But Chambers's cocksure forecasts of last year are long gone. "This is probably the second most difficult time in my career in terms with my comfort with the forecast," he said.

So, what to do?

First, Chambers believes Cisco's strategies -- including big bets on collaboration and Web 2.0, and the rearranging of the company into councils and boards rather than a strict hierarchy, are still correct.

But Cisco will aim to cut $1 billion from its budget for fiscal 2009, which ends in July. Chambers listed several areas for cutbacks, including travel, events, and prototype marketing.

At the same time, Chambers wants to keep Cisco on the offensive. One area of investment will be the United States, where Cisco plans to pour money into adjacent markets that will eventually tie in with Cisco's networking products. "In our opinion, the U.S. will be the first to recover," he said.

Cisco also wants to cozy up to emerging countries including China and India, spending even more money in those areas. "Over time, we expect the majority of the world's GDP will come from these countries," Chambers said, noting that Cisco followed a strategy similar to this during the 1997 Asian financial crisis.

For its first quarter, which ended Oct. 25, Cisco's revenues landed on target, at $10.33 billion, slightly less than $10.36 billion last quarter. (See Cisco Reports Q1.)

In net income, Cisco reported $2.2 billion, or 37 cents per share, according to generally accepted accounting principles (GAAP). That's compared with $2 billion and 33 cents per share the previous quarter.

Cisco's non-GAAP net income of 42 cents per share beat Wall Street estimates by 3 cents.

During Cisco's earnings call, Reuters was reporting the company's stock was down 6 percent after-hours, after ending the day at $17.39 per share.

— Craig Matsumoto, West Coast Editor, Light Reading

Pete Baldwin 12/5/2012 | 3:27:56 PM
re: Cisco Predicts Q2 Plunge Reuters timeline of John Chambers's comments about the economy, starting with today and going back to "the strongest global economy I have been a part of" in August 2007.

http://tinyurl.com/6lmd5w
gbmorrison 12/5/2012 | 3:27:55 PM
re: Cisco Predicts Q2 Plunge Not good, but not surprising. I remember a conf in 2004 talking for a while with a head IT honcho for Ford Motor and how he gloated away about the Ford dynasty and how well he gets treated by Cisco and all his other vendors. Life's changed since then! The cuts in corp enterprise IT spending just from the Big 3 car makers alone has gotta hurt. Still have to note here, Cisco: $2B in NET income in a single quarter!?! Awesome by any measure.
materialgirl 12/5/2012 | 3:27:37 PM
re: Cisco Predicts Q2 Plunge Yes the economy is tough, but CSCO products are getting long in the tooth. Perhaps they are also losing share and blaming the economy. After all, JNPR grew Infrastructure sales 25%-plus in their September quarter, while CSCO managed only 1%. They cannot compete with adjacent vendors like RVBD and in Nexus, Jayshree Ullal has gone to a competitor. The 7600 seems to be on its last legs.

So, why doesn't this company update their product line a little?
K28.5 12/5/2012 | 3:27:36 PM
re: Cisco Predicts Q2 Plunge mg,
I guess you intended to invite a CSCO employee to reply: "Hey, we have something coming next week", right?
http://www.lightreading.com/do...

K
gbmorrison 12/5/2012 | 3:27:35 PM
re: Cisco Predicts Q2 Plunge I know it's fun rooting for the underdog, especially if you work for the underdog, but JNPR's infra product and service rev was $729M in the Sept quarter. CSCO's in the Oct quarter was along the lines of $2.75B ($1.9B in router product; I took half the $1.7B in services number).
materialgirl 12/5/2012 | 3:27:32 PM
re: Cisco Predicts Q2 Plunge Dear k28.5:
That was funny. No, you are ahead of me on that one. However, even if they do announce a super new OS this week, how soon will true uptake start? A year from now?

Just from reading these posts, my basic question is this: how can such a "super" company let a critical part of its value prop get so out dated? It is like GM trying to sell gas guzzlers, or a telco trying to sell voice, or MSFT trying to sell Vista. It seems as though big successful companies always fall on the sword of their old winners and never move beyond them.

I just thought CSCO was better than that.
brtechy 12/5/2012 | 3:27:30 PM
re: Cisco Predicts Q2 Plunge Hi MG,

I agree with you on the part about being more careful with the portfolio evolution, because after al, if CSCO wants to continue selling itself as a growth company, virtually all of the product lines have to remain pumping results very consistently, as it is hard to replace several $B of revenue in any single one of them.

Part I don't agree is the capacity to react: remember what the CRS-1 did to JNPR, take a look at switching results this last Q, UC is becoming dominant in the ENT voice world, Video seems to be going strong with the integration of the former Scientific Atlanta (now SPVTG - Service Provider Video Technologies Group) and Nexus still has a long life ahead. I don't know what they will announce on the 11th (that was funny indeed), but I believe CSCO saw your concerns a while ago and is acting on them.

Another very interesting result observed in the downtimes: recent research (hearsay, sorry but don't have full source) indicates that while CEOs of F500 companies almost unanimously agree on cautious outlooks for IT spending in the coming year, they also seemed to indicate that of they core vendors Cisco was one to be impacted the least. John chambers has a quote which is interesting, and it refers to the fact that CSCO's internal network, with video, UC, Web2.0 and virtualization, keeps growing in bandwidth at around 400% YoY, and that many of CSCO's customers networks were starting to go in the same direction.

My question on CSCO's future growth would be different than yours, and it would be: how well can CSCO do on market adjacencies (data center, virtualization, servers, SaaS, Home)? There lies the answer to the next wave of multi $B growth. Well, there and in the economy... (did you notice Chambers saying the US will rebound before anybody else?)
Stevery 12/5/2012 | 3:27:29 PM
re: Cisco Predicts Q2 Plunge , if CSCO wants to continue selling itself as a growth company, virtually all of the product lines have to remain pumping results very consistently,

I don't know about you, but I think there's plenty of room for growth in this Cisco product line:

http://tinyurl.com/54bq4

With the depression upon us, I'll bet sales go thru the roof, FTC be damned.
brtechy 12/5/2012 | 3:27:20 PM
re: Cisco Predicts Q2 Plunge Genius! I wonder why they are not including this as rebate for those who buy in to ASR9000... Is there still time?


"I don't know about you, but I think there's plenty of room for growth in this Cisco product line:

http://tinyurl.com/54bq4

With the depression upon us, I'll bet sales go thru the roof, FTC be damned."
Pete Baldwin 12/5/2012 | 3:27:19 PM
re: Cisco Predicts Q2 Plunge brtechy: I like it!

Alternatively: Given how the market for used network equipment is probably going to skyrocket next year (think of all the surplus that's going to get dumped on the market), a case of Cisco for every new router purchased seems more than fair.

(original message from Stevery):
>>>
"I don't know about you, but I think there's plenty of room for growth in this Cisco product line:

http://tinyurl.com/54bq4

With the depression upon us, I'll bet sales go thru the roof, FTC be damned."
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