Cisco Shares Fall as Forecasts Miss Analysts’ Estimates

Cisco Third-Quarter Profit Rises as Networking Spending Gains
Cisco Systems Inc. signage is displayed outside of the company's headquarters in San Jose, California. Photographer: David Paul Morris/Bloomberg

Cisco Systems Inc. fell the most in 15 months after the maker of computer-networking equipment forecast fourth-quarter sales and profit that missed analysts’ estimates, saying some business clients are reluctant to spend.

Profit before some costs in the period ending in July will be 44 cents to 46 cents a share, Cisco said on a conference call yesterday. Revenue will rise 2 percent to 5 percent from a year earlier, Cisco said, indicating a range of $11.4 billion to $11.8 billion. Analysts on average had projected profit of 48 cents on sales of $12 billion, according to data compiled by Bloomberg. The shares fell as much as 9.3 percent in Germany.

Chief Executive Officer John Chambers said orders from big companies dropped in the third quarter, and it’s taking longer to sign large deals with corporate customers. Cisco is also concerned about demand from Europe, India and government agencies, he said. The weakness threatens to hamper turnaround efforts started last year by Chambers, who has cut jobs, shut businesses and reduced prices to win market share.

“It’s the economy,” said Matt Robison, an analyst at Wunderlich Securities Inc., who has a buy rating on the stock. “We’ve had some pretty squishy economic data in recent weeks, and you’ve always got to brace for some caveats in the outlook commentary from a company like Cisco.”

The shares fell 8.5 percent to $17.19 at 9:42 a.m. in New York, for the biggest intraday plunge since Feb. 10, 2011. They had gained 3.9 percent this year before today.

‘Hesitant Spending’

“We are seeing a hesitant spending environment,” Chambers said on the conference call. “There are areas of the macroeconomic environment we cannot control.”

Last year, Chambers took steps to slim down the company amid slowing customer spending and increased competition from Juniper Networks Inc., Hewlett-Packard Co. and Huawei Technologies Co. Chambers fired thousands of workers, abandoned less-profitable businesses such as the Flip video-camera unit, and eliminated a council-based management structure that slowed decision making. He refocused on the company’s main routing and switching businesses and gave the sales team more freedom to do deals faster.

“They’re executing pretty well, but I think they have more they can do operationally,” Wunderlich’s Robison said.

Customer Attitudes

In the third quarter, which ended April 28, net income climbed 20 percent to $2.17 billion, or 40 cents a share, from $1.81 billion, or 33 cents, a year earlier, the San Jose, California-based company said in a statement yesterday.

Sales rose 6.6 percent to $11.6 billion, matching the average analyst estimate. Profit before certain costs was 48 cents, compared with the average projection of 47 cents.

Chambers said the attitude of some large corporate customers toward spending got “a little bit tougher” during the third quarter. The 1 percent decline in orders from those customers was a surprise, Robison said.

Cisco’s orders from telecommunications-service providers rose 5 percent for the period, as the company’s price cuts spurred demand. Many analysts were predicting that Cisco would be hurt by weaker spending by service providers, which has curbed growth at Juniper Networks.

Industry Indicator

Cisco is seen as a bellwether for the broader technology industry because 80 percent of its sales every quarter come from new business, making its forecasts a reliable gauge of real-time spending trends, said Frank Calderoni, Cisco’s chief financial officer.

Networking products such as routers and switches are also utility-like products that must be upgraded frequently to handle increasing data traffic, he said.

“We really are just reflecting back what we’re hearing from customers and what they’re experiencing,” Calderoni said in an interview. He said the situation was changing quickly, and shouldn’t be applied to the outlook beyond the fourth quarter.

Alkesh Shah, an analyst at Evercore Partners Inc. in New York, said Cisco is “leaner and more competitive” after Chambers’s cost cuts, and still stands to benefit from increasing traffic on networks from bandwidth-heavy content, such as online videos.

“The longer-term demand trends are intact and the stock is inexpensive,” said Shah, who has the equivalent of a buy rating on the shares.


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