Cisco outlook underwhelms, economy fears persist

Wed May 9, 2012 7:46pm EDT

A pedestrian walks past the Cisco logo at the technology company's campus in San Jose, California February 3, 2010. REUTERS/Robert Galbraith

A pedestrian walks past the Cisco logo at the technology company's campus in San Jose, California February 3, 2010.

Credit: Reuters/Robert Galbraith

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(Reuters) - Cisco Systems Inc (CSCO.O) forecast quarterly earnings below Wall Street's expectations, accentuating concerns about global technology spending and the network equipment maker's ability to weather persistent economic weakness.

Shares in the company, which relies on government and corporate spending on Internet gear, slid more than 8 percent after hours, despite beating analysts' third-quarter earnings estimates by a penny.

The company, which Chief Executive John Chambers a year ago admitted had "lost its way" after several quarters of sub-par growth, forecast revenue growth of 2 to 5 percent in the fourth quarter.

That translates into revenue of about $11.4 billion to almost $11.8 billion this quarter, lagging Wall Street's average forecast of $12 billion.

Cisco also estimated earnings of 44 to 46 cents a share, excluding items, in the fiscal fourth quarter ending in July. Wall Street analysts had on average expected 49 cents a share.

Chambers acknowledged that it was it was "really hard to read" what would happen in the second half the year but added that customers have said their plans were to spend more in that period.

"However, in the very next sentence they said we are waiting to see what happens in Europe and what happens with government policy," Chambers said, adding that customers had grown more conservative.

Recession in the euro zone is forecast to last until the third quarter before modest growth returns, a Reuters survey showed, but the median outlook masks a wide spread of opinion, with bears forecasting contraction out to late 2013. EUGDPQ

Analysts warned that technology spending by enterprises and governments remained weak, with European and U.S. economies still on shaky ground.

"There is definitely some macro impact. But Cisco is also facing tougher competition from rival HP," said Global Equities Research analyst Trip Chowdhry.

"HP hit bottom and they are on their way up. They have become smarter," he said. "On the other hand, Cisco is suffering from stagnation. They are laying people off. How are you going to innovate and win if you are laying people off? Their remaining employees aren't motivated to win."

NONE TOO SHABBY?

Shares in Cisco, whose rivals include Hewlett-Packard Co (HPQ.N) and Juniper Networks (JNPR.N), slid to $17.23 in extended trading from a close of $18.78 on Nasdaq.

Analysts had counted on a solid quarter driven by U.S. enterprise and commercial demand, as well as gains in the router and switches markets, offsetting weakness in the public sector and Europe.

Total third-quarter revenue rose 6.6 percent from the year-ago quarter to $11.59 billion, compared with a Street view of $11.58 billion, the company said on Wednesday. It posted a 5 percent jump in revenue from its core business of network switching in the same quarter.

In its Europe, Middle East and Africa region, revenue rose just 4.6 percent, while U.S. revenue was up an even more anemic 3.2 percent from a year earlier.

Earnings, excluding items, were 48 cents per share compared with the average estimate of 47 cents a share as compiled by Thomson Reuters I/B/E/S.

"It's not too shabby, considering the choppy environment we are in," said Mark Sue, analyst at RBC Capital Market.

"Still, the global macro storm clouds are gathering and it remains to be seen if Cisco can use its new-found execution prowess to navigate this difficult environment."

(Reporting by Nicola Leske in Las Vegas, additional reporting by Jim Finkle in Boston; Editing by Richard Chang)

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