Cisco Sales Miss Casts Shadow Over CEO’s Turnaround Plan

Cisco Systems Inc. (CSCO)’s shares fell 11 percent after the company forecast its first quarterly sales decline in four years, adding to evidence that Chief Executive Officer John Chambers’s turnaround plan is sputtering.

The stock of the world’s largest maker of computer-networking equipment dropped to $21.37 at the close in New York, the biggest percentage decline since February 2011. Cisco yesterday said revenue in the current quarter, which ends in January, will decline 8 percent to 10 percent from a year earlier, while analysts were predicting on average 4 percent growth, according to data compiled by Bloomberg.

Cisco is facing slower spending by phone companies and large corporations, as well as economic weakness in Europe, Asia and emerging economies. Chambers, 64, who became CEO in 1995, began a revamp in 2011 by cutting staff, eliminating low-margin businesses and pushing sales of switches, routers and more software to boost speeds and efficiency. The CEO has reduced headcount by 12,300 and acquired 59 companies for $10.9 billion, seeking to leave his successor a healthy company when retires.

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

The sales forecast indicates revenue of $10.9 billion to $11.1 billion, compared with analysts’ average projection for $12.6 billion. Profit excluding some items will be 45 cents to 47 cents a share in the fiscal second quarter, executives said on a conference call yesterday. That compares with analysts’ average projection for profit of 52 cents.

Slow Turnaround

Cisco’s board also authorized $15 billion in additional stock buybacks.

“Based on what we saw in the month of October and continuing into November and how pervasive it was, we’re not expecting things to turn around quickly” in emerging markets, Cisco Chief Financial Officer Frank Calderoni said in an interview. The San Jose, California-based company probably won’t show revenue growth until the quarter that ends in August 2014, he said.

First-quarter revenue was $12.1 billion, Cisco said in a statement yesterday, missing analysts’ average projection for sales of $12.3 billion. Net income for the first quarter, which ended Oct. 26, fell to $2 billion, or 37 cents a share, from $2.09 billion, or 39 cents, a year earlier.

Competitive Challenge

Cisco is facing declining demand for low-end networking equipment and cutting prices to bolster sales of switches and routers, seeking to fend off challenges from Huawei Technologies Co., Juniper Networks Inc. (JNPR) and Alcatel-Lucent SA. (ALU) At the same time, Cisco is aiming to generate sales of its own technology featuring advanced tools, competing with Palo Alto Networks Inc. (PANW), Arista Networks Inc. and other rivals.

While the equipment maker decided to limit exposure to low-margin products, it also needs to regain lost share in the market for lower-end routers, Calderoni said.

New products, such as a high-end switch called the Nexus 9000 designed for data-center operators and a new high-end core router used by phone companies to move traffic between countries and regions, will be crucial to determining whether Cisco can keep up with rivals, according to Ray Mota, founder of market-research firm ACG Research in Gilbert, Arizona.

“Juniper had fantastic growth with service providers last quarter,” Mota said. “If Cisco didn’t, it’s not just a macroeconomic problem.”

Difficult Quarter

Gross margin in the first quarter was 63 percent for the period, compared with analysts’ prediction for 61.9 percent. The company had forecast 61 percent to 62 percent.

“This is not the quarter that’s going to light a fire under the stock,” said Keith Goddard, president of Capital Advisors Inc. in Tulsa, Oklahoma, which owns 405,000 Cisco shares. “We’ll hold the stock, but it’s a low-quality quarter.”

Cisco is also facing challenges from Asian hardware manufacturers that are building basic routers and switches for companies such as Facebook Inc. and Google Inc., which use software to boost the performance of their networks.

Chambers says that most customers will continue to need well-tested systems that combine its hardware and software to keep up with skyrocketing traffic as billions of tablets, smartphones and other devices come onto the network.

Keeping Course

Cisco executives reiterated their guidance that the company can grow 5 percent to 7 percent over the long term and said they’re sticking to the current strategy.

“We’re continuing down the path we’ve been on for the past few years,” Calderoni said on the call. “What we see in the short term doesn’t mean that long-term plan has to change.”

Chambers in August said Cisco would eliminate 4,000 positions, or 5 percent of the workforce. Including those cuts, Cisco will have eliminated 12,300 jobs in the past two years as it exits consumer businesses while focusing on corporate software and technology services.

“He’s not going down without a fight,” McKechnie said of Chambers. “I have a lot of respect for him wanting to stay in the turret to see them through this. I’d rather see Chambers stay on board, rather than put the company through a management change.”

To contact the reporter on this story: Peter Burrows in San Francisco at pburrows@bloomberg.net

To contact the editor responsible for this story: Pui-Wing Tam at ptam13@bloomberg.net

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