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Cisco Third-Quarter Sales Forecast May Miss Some Estimates

Cisco Systems Inc. (CSCO) forecast sales for the fiscal third quarter that may miss some analysts’ estimates amid weakness in emerging markets and a slump in demand from telecommunications-service providers.

Revenue will decline 6 percent to 8 percent in the current period ending in April, the San Jose, California-based company said on a conference call yesterday. That indicates sales of $11.2 billion to $11.5 billion, while analysts projected $11.3 billion on average, according to data compiled by Bloomberg. The shares fell in extended trading.

The world’s biggest maker of network routers and switches is being hurt by a slowdown in sales outside the U.S. and competition from Huawei Technologies Co., Juniper Networks Inc. and Hewlett-Packard Co. Investors are concerned that Cisco’s forecast indicates it will continue to face difficulties in selling products in emerging markets, according to Bill Kreher, an analyst at Edward Jones & Co. in St. Louis, Missouri.

“There was some hope that the inflection point in the company’s business would happen earlier as opposed to later,” said Kreher, who has a hold rating on the stock. “But now, a return to growth in fiscal ’14 seems unlikely.”

The shares fell 2.5 percent to $22.27 at the close in new York.

Photographer: David Paul Morris/Bloomberg

Cisco Systems Inc. is benefiting as more people browse the Web, check e-mail and use applications on mobile devices. Close

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Photographer: David Paul Morris/Bloomberg

Cisco Systems Inc. is benefiting as more people browse the Web, check e-mail and use applications on mobile devices.

Net income shrank 55 percent to $1.43 billion, or 27 cents a share, compared with analysts’ average projection for 36 cents.

Long-Term Slowdown

Cisco is facing a long-term slowdown amid declining demand in emerging markets and from telecommunications-service providers, which caused the company to reduce its revenue outlook in December. The company forecast average sales growth of 3 percent to 6 percent in the next three to five years, down from an earlier projection for a 5 percent to 7 percent rise.

“There’s a concern that emerging markets aren’t going to come back, or that their position in service providers will continue to be under pressure,” said Jayson Noland, an analyst at Robert W. Baird & Co. in San Francisco.

The company is facing pressure on several fronts, complicating efforts by Chief Executive Officer John Chambers to leave the company on an upswing when he retires, possibly as soon as this year. Cisco said in August that it was cutting 4,000 jobs, or 5 percent of its workforce, amid weaker sales in Japan, China and Europe and competition from Huawei, Juniper Networks and Hewlett-Packard. The cuts brought to 12,300 the number of jobs Cisco has eliminated over the past two years as it has exited consumer businesses while focusing on corporate software and technology services.

Product Hiccups

Profit excluding some items was 47 cents a share and revenue was $11.2 billion in the fiscal second quarter through Jan. 25, Cisco said in a statement yesterday. Analysts had projected profit of 46 cents and $11 billion in sales.

Sales of network switches, Cisco’s biggest business, declined 12 percent to $3.27 billion, while routers fell 11 percent to $1.74 billion. Product orders in all regions fell.

Cisco’s income was reduced by a $655 million pretax charge to fix manufacturing issues with failing memory chips in some of its products. The chips were made by a single supplier -- which Cisco didn’t name -- between 2005 and 2010 and slowly degraded over time, causing some devices to fail.

“Failure rates due to this issue have been and are expected to be low,” Cisco said in a statement. “However, recently Cisco has seen a handful of its customers experience a growing number of failures in their networks as a result of this component problem.”

China Challenge

A 12 percent decline in orders from telecommunications-service providers was mostly caused by customers evaluating new Cisco machines that will begin shipping in large quantities later this year, Frank Calderoni, Cisco’s chief financial officer, said in an interview. The company continues to experience competitive challenges in China, he said.

“We did what we said we were going to do -- both top line and bottom line came in better than we anticipated, and we guided pretty much in-line for the next quarter,” Calderoni said.

For the current quarter, Cisco forecast that profit excluding some items will be 47 cents to 49 cents per share, compared with an estimate of 48 cents per share.

Internet Devices

Chambers has identified the so-called Internet of Everything -- referring to the Internet connections being added to everything from cars to refrigerators to garbage cans -- as Cisco’s next opportunity. At the International Consumer Electronics Show in January, Chambers presented his vision of a world where people’s preferences follow them digitally from Internet-connected objects in their homes and transit, at hotels and airports, and at work.

Cisco said earlier this month that it anticipates 4.9 billion mobile users worldwide by 2018, up from 4.1 billion in 2013, and that 69 percent of all mobile data traffic will be video. The trend is helping to make up for weakness in sales outside of the U.S. and greater competition.

To contact the reporter on this story: Jordan Robertson in San Francisco at jrobertson40@bloomberg.net

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

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