Tariffs, China sales weigh on Cisco outlook, shares slide

(Reuters) - Cisco Systems Inc said on Wednesday that impending U.S. tariffs and Chinese customers shunning the networking company’s gear were weighing on its business, and it forecast sales and profit below Wall Street targets.

FILE PHOTO: A man passes under a Cisco logo at the Mobile World Congress in Barcelona, Spain February 25, 2019. REUTERS/Sergio Perez

Cisco executives said sales in China fell 25% and that the country’s state-owned enterprises were no longer taking bids from Cisco.

“We’re not being allowed to even participate anymore,” Cisco Chief Executive Chuck Robbins told investors on a conference call.

Chief Financial Officer Kelly Kramer said in an interview that Chinese companies were dropping Cisco gear and instead buying hardware from domestic Chinese companies.

“There’s a certain sense of nationalism,” Kramer said.

Cisco estimated first-quarter revenue growth of 0% to 2%. This implies a range of $13.07 billion to $13.33 billion, while analysts expect $13.40 billion, according to IBES data from Refinitiv.

It estimated adjusted earnings of 80 cents to 82 cents per share in the first quarter of 2020, below analysts’ forecast of 83 cents.

Shares of Cisco, a Dow component, fell 3.4% in the runup to results amid broader declines in the market, and dropped 8% to $46.53 in after-hours trading.

While sales to China fell sharply, they comprised less than 3% of overall sales in Cisco’s fiscal fourth quarter. Slower orders from large businesses, especially in the United Kingdom, also contributed to the below-expectations forecast.

Cisco said U.S. tariffs on Chinese-made goods would soon hit its products, dragging down margins in its fiscal first quarter. U.S. President Donald Trump said this week he would delay a 10% tariff on some Chinese-made goods until December. But Kramer said most of Cisco’s goods were not part of the temporary reprieve and face tariffs next month.

“Nothing got excluded so far,” Kramer said.

That would weigh on the company’s margins in its fiscal first quarter, she added. Cisco forecast adjusted gross margins of 63% to 64%, virtually unchanged from the 62.9% in the just-reported quarter.

Since taking the helm in July 2015, CEO Robbins has emphasized growth areas such as the cloud, Internet of Things and cybersecurity through acquisitions.

Sales in Cisco’s cybersecurity business, which offers firewall protection and breach detection systems, rose 14% to $714 million in the fourth quarter, but missed estimates of $737.1 million.

Net income fell to $2.21 billion, or 51 cents per share, in the fourth quarter ended July 27. Excluding items, it earned 83 cents, above estimates of 82 cents.

Total revenue rose 4.5% to $13.43 billion and beat the average analyst estimate of $13.39 billion.

Reporting by Sayanti Chakraborty in Bengaluru and and Stephen Nellis in San Francisco; Editing by Arun Koyyur and Richard Chang