Cisco Forecasts Revenue, Earnings That May Miss Estimates

Cisco CEO John Chambers
John Chambers, chief executive officer of Cisco Systems Inc. Photographer: Jacob Kepler/Bloomberg

Cisco Systems Inc., the largest maker of networking gear, forecast profit and sales that may miss analysts’ estimates amid price pressure in the markets for routers and switches, which direct Internet traffic.

Profit excluding some costs will be 37 cents to 39 cents a share in the fourth fiscal quarter, while sales will be about $10.8 billion to $11.1 billion, San Jose, California-based Cisco said today on a conference call. Analysts on average had predicted profit of 41 cents and sales of $11.6 billion. Cisco slipped in extended trading.

Cisco, which has lost about $50 billion in market value in the last year, is revamping management and scaling back some businesses after losing share to rivals such as Hewlett-Packard Co. Chief Executive Officer John Chambers said on the call that he’ll eliminate jobs while girding for weakness and lower public-sector spending this quarter. He ditched a longstanding prediction for annual sales growth of 12 percent to 17 percent.

“I don’t think anyone’s expecting them to set the bar high,” Shaw Wu, an analyst at Sterne, Agee and Leach Inc., said in an interview with Bloomberg Television. He has a “buy” rating on the shares.

Cisco fell to as low as $17.12 in late trading after slipping 1 cent to $17.78 at 4 p.m. on the Nasdaq Stock Market.

Profit excluding certain costs was unchanged at 42 cents a share in the fiscal third quarter, Cisco said in a statement. Analysts surveyed by Bloomberg predicted profit, on average, of 37 cents.

‘Doing Well’

Sales rose 4.8 percent to $10.87 billion in the period that ended April 30. Analysts expected sales of $10.86 billion.

Cisco said during the quarter that one of its high-end routers, the CRS-3, is being adopted faster than the device’s earlier versions. Gross margin, the percentage of profit left after subtracting production costs, was 63.9 percent. Analysts surveyed by Bloomberg estimated, on average, 61.9 percent.

“There are clearly areas of Cisco that are doing well,” Tim Savageaux, an analyst at Terrapin Research in San Francisco, said before the results were released.

Investors view Cisco as a bellwether for the technology industry because it dominates the market for routers and switches, which direct Internet traffic. Companies buy its switches for corporate networks, while phone and Web-service providers typically purchase Cisco’s more-expensive routers.

‘Off the Table’

Chambers said in August 2007 that revenue would rise 12 percent to 17 percent a year amid rising demand for Cisco’s products. He said today that the forecast is “off the table.”

Cisco’s shares have declined 32 percent in the past year, compared with the 16 percent gain in the Standard & Poor’s 500 Index. It struggled to maintain historic levels of profitability amid an expansion into more than 30 side businesses such as smart grids, home networking and digital music hosting.

The broadened ambitions let rivals such as Hewlett-Packard, Huawei Technologies Co. and Juniper Networks Inc. encroach on key markets. In Ethernet switches, Cisco’s share dropped to 67 percent last year from 69 percent in 2006, according to IDC, a market-research firm in Framingham, Massachusetts. In routers, Cisco’s share dropped to 55 percent last year from 66 percent.

“Cisco took advantage of some utopian conditions in the last decade,” said Mark Fabbi, an analyst at Gartner Inc. Yet now, “companies are getting smart and forcing Cisco to earn their businesses again.”

Chambers has promised to sharpen the company’s focus. He overhauled management May 5 to concentrate on three regions and rein in Cisco’s council-style management structure, which investors and former employees said slowed decision making and fueled market-share losses. Last month, the company said it will shut the Flip video-camera unit and cut 550 jobs.

AT&T Inc., the No. 2 U.S. wireless carrier, said today that it will power Cisco’s Cius tablet device the company unveiled a year ago. The Cius, to go on sale later this year, has a 7-inch screen and can support high-definition video conferencing.