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Cisco Sounds Warning Bells

Cisco Systems Inc. (Nasdaq: CSCO) expects a drastic slowdown in revenue growth during the current quarter as the unsteady U.S. economy is translating into weaker sales.

The news, delivered during today's second-quarter earnings call with analysts, could add another lodestone to a sector that's already been hammered by Wall Street so far this year.

CEO John Chambers noted on the call that Cisco's product order growth dipped to less than 10 percent in January -- adding that it might stay that way for a while.

"Given the uncertainty of the global financial markets and the cautiousness we are seeing from customers and some of our peers, we believe that the proper approach to guidance... is to assume that January's order growth rates may continue over the next several months," Chambers said.

[Ed. note: Nnnoooooooooo!!!!!]

That means Cisco's forecast for the third quarter, which ends in April, is for revenue growth of 10 percent from the previous year, implying sales of $9.75 billion. Analysts polled by Reuters Research were expecting $10.2 billion for the quarter.

Cisco shares were down $1.66 (7.2%) at $21.42 in after-hours trading.

The shares had been inching upward as the earnings call began and were up $0.84 (3.6%) to $23.92 in the minutes before Chambers's glum forecast.

Cisco gave hints of a slowdown with its first-quarter earnings, saying it saw sales weakening in its largest U.S. enterprise customers. But that trend didn't resurface in subsequent earnings from companies like Juniper Networks Inc. (NYSE: JNPR). (See Investors Frown on Cisco Q1 and Juniper Scores in Q4.)

Cisco continues to say its long-term revenue growth will be 12 percent to 17 percent. But whether a return to that level takes "one or two quarters, or a little longer, is yet to be determined," Chambers said.

It's primarily the United States and European customers that are becoming "overly cautious," leading to the slowdown, Chambers said. Much of that is on the enterprise side, though; the service provider business is where Cisco is feeling "most comfortable," he said.

For its second quarter, which ended January 26, Cisco reported revenues of $9.83 billion and net income of $2.06 billion, or 33 cents per share, compared with first-quarter revenues of $9.56 billion and net income of $2.21 billion, 35 cents per share.

For its second quarter a year ago, Cisco reported revenues of $8.44 billion and net income of $1.92 billion, 31 cents per share.

Cisco's pro forma earnings of 38 cents per share exactly met the consensus analysis tallied by Reuters.

— Craig Matsumoto, West Coast Editor, Light Reading

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Pete Baldwin 12/5/2012 | 3:48:28 PM
re: Cisco Sounds Warning Bells Chambers says:

1. The long term 12-17% story is intact

2. Cisco intends to use the slowdown as an opportunity to gain market share, "as we have done in the past."

He might be right, but it won't make the next quarter any more fun.
dwdm 12/5/2012 | 3:48:27 PM
re: Cisco Sounds Warning Bells I don't get it. Cisco makes billions in profit and income and even though the US is in deep economic trouble, they plan to grow 10%. That doesn't sound great? I will never understand..
Pete Baldwin 12/5/2012 | 3:48:26 PM
re: Cisco Sounds Warning Bells There's the usual Wall Street reasoning -- that better growth was baked into the share price, so Cisco loses value with today's news.

The bigger question is what the implications are for everyone else in Cisco's space, particularly enterprise networking. If Cisco grows only 10%, does that mean even worse things for others? And is that a one-quarter dip, or the start of something longer and horrible? Lots of uncomfortable questions get opened up here.
2bits 12/5/2012 | 3:48:24 PM
re: Cisco Sounds Warning Bells "The news ... could add another lodestone to a sector that's already been hammered by Wall Street so far this year."

Have you looked up the meaning of lodestone? Its a magnet guys! You're adding magnetic stones to a hammered sector. Get the mixed metaphor police!

Mark Sebastyn 12/5/2012 | 3:48:23 PM
re: Cisco Sounds Warning Bells I believe the word you wanted was 'lodestar'.
Pete Baldwin 12/5/2012 | 3:48:21 PM
re: Cisco Sounds Warning Bells I was probably looking for "millstone" but just spent too many years playing Nethack in my youth.
baileyshbr 12/5/2012 | 3:48:21 PM
re: Cisco Sounds Warning Bells It is silly for anyone to believe a CEO when they try to predict an upturn in market conditions. The other CEO's that Chambers speaks to really don't know what their company is going to do in 6 months (look at Motorola).

This is similar to the "experts" predicting a quick turn around in the housing market... what planet are they living on!
paolo.franzoi 12/5/2012 | 3:48:20 PM
re: Cisco Sounds Warning Bells
If you think that it is acceptable to run a business without a view to the future, then you must not invest in anything. Think of three potential outcomes:

1 - Things get better
2 - Things get worse
3 - Things stay the same

You should have a view to which of these is most likely AND react to it. If you don't have a view (right or wrong), then you should be fired OR at least tune your business to "stay the same". If that means profits are down, then you have to lay off/attrit people out of the business.

seven
materialgirl 12/5/2012 | 3:48:19 PM
re: Cisco Sounds Warning Bells In a CC long on "balance across products and theaters" and "competition from a product and business architecture prospective", little was said about actual product performance.

The weakest sector was US enterprise switching. Is this because US enterprise cap-ex is off, or because CSCO is off? Is IOS just too slow and complex to handle tomorrow's problems? In the RVBD call for instance, management crowed about "boomerang sales" of CSCO replacements. They saw no slowdown.

It seems to me that IOS is indeed too old, monolithic and modded to support tomorrow's "intelligent network" workloads. If not, why introduce yet another new OS in their most recent switch?

Indeed, investors think "as CSCO goes, so goes the economy", but it might be CSCO's sun that is setting. Once service providers cut back on cap-ex, watch out below!
metroman 12/5/2012 | 3:48:13 PM
re: Cisco Sounds Warning Bells Gotman

Having seen a couple of your comments in the last few days, you seem to have a great deal to say about the opinions and motivations of others and very little to say on the topic. You seem to be taking a very moralistic stance without actually contributing. Psycologically you seem to want to draw our attention to your high moral values rather than your knowledge of the topic.

Perhaps you could enlighten us with your opinion, pure and unsullied as you would have us believe it is. Then we can bask in your glorious light.

Or

You don't actually have an opinion and you just like criticising other people for what you percieve their motivations are and you have little substance other than that.

You prove it to us one way or another with your next post .... i double dare you!

Metroman
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