Cisco warns of revenue slide as hardware spending sputters

Wed Feb 12, 2014 8:12pm EST

A Cisco office is pictured in San Diego, California November 12, 2012. REUTERS/Mike Blake

A Cisco office is pictured in San Diego, California November 12, 2012.

Credit: Reuters/Mike Blake

(Reuters) - Cisco Systems Inc (CSCO.O) on Wednesday forecast a 6 to 8 percent revenue slide this quarter, underlining the network gear maker's struggle to rekindle demand in emerging markets like China even as hardware spending globally sags.

That gloomy outlook, though about in line with Wall Street expectations, marks another severe decline in sales for the former high-flying tech company, which has partly blamed its poor run on a boycott of U.S. equipment after revelations of American spying efforts globally.

Enterprise hardware spending is dwindling across the globe as corporations cope with shrinking budgets, slowing or uncertain economies and a fundamental migration to cloud computing, which reduces demand for equipment by outsourcing data management and computing needs.

Chief Executive John Chambers told analysts on a conference call that the decline in emerging markets had slowed, but cautioned that it was too early to speak of a trend. Chief Financial Officer Frank Calderoni added that the situation in China in particular was showing signs of improvement.

But that improvement is coming off an exceedingly low base. The company reported second fiscal quarter results on Wednesday, and orders in Brazil, India, China, Russia and Mexico were down 10 percent compared with the previous quarter when orders in that region fell 20 percent.

"If you look at hardware spending across the board, it's being negatively impacted not just by the negative spending environment, but by the movement to the cloud," said FBN Securities analyst Shebly Seyrafi.

"Hardware's glory days are behind us, now it's matter of what can we do" to drive growth.

Cisco shares slipped 4 percent to $21.98 in afterhours trading, from a $22.85 close on the Nasdaq.

Its lackluster showing on Wednesday comes on the heels of dismal results from some of the biggest corporations in enterprise computing services.

Last month, IBM (IBM.N) missed Wall Street's revenue expectations for the fourth straight quarter. On Wednesday, storage equipment maker NetApp also missed sales expectations, sending its shares 4 percent lower.

In Cisco's case, it also faces an increasingly determined rival in Huawei, which is dominant in China but getting more aggressive beyond its home turf. Worryingly, product gross margins slid to 48.7 percent in the fiscal second quarter, from 60.1 percent in the previous three months.

HEYDAY OVER

Cisco's outlook for the fiscal third quarter ending April translates to a forecast for revenue of between $11.2 billion and $11.5 billion, versus the $11.3 billion analysts expect on average.

That suggests the company may still miss Wall Street's estimates.

In the second quarter, revenue from routers and switching equipment, which together make up slightly more than half of the company's overall revenue, both contracted more than 10 percent.

The company reported revenue of $11.2 billion in its second fiscal quarter, down from $12.1 billion a year earlier. Wall Street on average expected Cisco to report of $11.03 billion, according to Thomson Reuters I/B/E/S.

Asia Pacific sales fell 4 percent to $1.8 billion in the fiscal second quarter ended January. But revenue in the Americas led declines, with a 9 percent fall in the quarter.

Cisco reported non-GAAP earnings of 47 cents per share in the second quarter, a penny better than the 46 cents expected.

The company also said its board had approved a dividend increase of 2 cents to 19 cents.

"They put a pretty low bar for the second quarter. They reached their numbers on the reset. It shows the environment has stabilized," said Zeus Kerravalla at ZK research.

(Reporting by Nicola Leske; Editing by Cynthia Osterman)

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