Cisco’s Gloomy Outlook Prompts Investor Worry

Tom Jowitt is a leading British tech freelance and long standing contributor to TechWeek Europe

Investors take fright as Cisco warns of a sizeable drop in future revenues, but is the NSA spying scandal to blame?

Cisco’s plans to re-invent itself have hit a speed bump after the company warned of a worrying drop in sales in its next financial quarter. The company’s CEO, John Chambers has passed the blame to the US government claiming that the recent shutdown and spying allegations have hit technology providers.

The Cisco warning came after the networking giant released disappointing first quarter earnings figures.

For the period ended 26 October, Cisco reported net income down 4.6 percent to $2bn (£1.2bn) from $2.1bn (£1.3bn) in the same year ago quarter. Earnings per share likewise declined (by 5.1 percent) to $0.37 (£0.23).

The company did however report a modest 1.8 percent rise in sales to $12.1bn (£7.5bn) from $11.9bn (£7.4bn) a year ago. However it missed analysts’ average projected revenues of $12.3 billion (£7.7bn). Cisco itself had also forecast growth of 3 percent to 5 percent in the first quarter.

Financial Performance

Cisco CEO“This quarter we delivered record non-GAAP profitability and continued our steady stream of innovation and market leadership,” said Cisco chairman and CEO John Chambers. “While our revenue growth was below our expectation, our financials are strong, our strategy is strong and our innovation engine is executing extremely well. We remain confident in our long-term goal to be the #1 IT company in the world and help our customers solve their biggest business problems.”

Whilst the first quarter’s financial performance was mixed at best, Cisco warned that revenues are expected to decline between 8 percent and 10 percent in its second fiscal quarter. This sales forecast potentially means that Cisco will make revenue of $10.9bn (£6.8bn) to $11.1bn (£6.9bn), but analysts’ average projection for the next quarter was $12.6bn (£7.9bn).

This caused investors to take fright and resulted in a ten percent fall in its share price to $21.34 (£13.33) on Nasdaq.

US Government to blame?

Chambers used a conference call to subtly point the finger of blame at the US government for Cisco’s problems.

Cisco said it is facing declines in emerging markets such as China and elsewhere, as well as  declining demand for low-end networking equipment, and intense competition from the likes of Huawei Technologies, Juniper Networks and Alcatel-Lucent.

But it was weak demand in the emerging markets that seemed to have mostly hurt Cisco, as these markets have reportedly been ‘spooked’ by the political repercussions of the NSA spying allegations, which implicate tech service providers and equipment makers. The recent US government shutdown has also apparently dented business confidence.

Chambers reportedly said the shutdown “exasperated the lack of confidence among business leaders we had highlighted over the past few quarters.”

“The last two weeks of the last quarter was really tough,” Chambers told analysts.

But Cisco also noted that it had seen a large decline in revenue from set-top box sales as it veered away from less profitable contracts in that market.

The challenges that Cisco is facing has led some to question Cisco’s two year turnaround plan.

“Chambers is probably doing the right things, but it doesn’t change the fact that he’s facing some pretty big challenges.” Mark McKechnie, an analyst at Evercore Partners LLC who has the equivalent of a hold rating on the stock, was quoted as saying on Bloomberg. “Cisco’s in a tough position.”

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