Cisco Systems had a relatively strong third quarter, but most of the positives are being eclipsed by weak projections for the current financial period and worries about what those projections say about IT spending and the global economy.
In numbers announced May 9, Cisco executives said the company saw sales grow 7 percent over the same time last year, to $11.6 billion, with net income hitting $2.2 billion, a 20 percent rise. CEO John Chambers noted strength in cloud, video and services businesses, adding that the restructuring the company underwent has helped push those numbers.
However, what got the most attention was Ciscos outlook for the current quarter, with revenue growth projections at 2 percent to 5 percent, below the 7 percent Wall Street analysts were looking for. During a conference call with analysts and journalists May 9, Chambers said enterprises and service providers are increasingly skittish about the global economic situation, particularly in Europe, with some taking a wait-and-see approach before spending their IT dollars.
Given the significant number of large enterprise customers and the global reach of its business, Cisco is closely watched as an indication of where high-tech spending is going and how the worldwide economy is faring. If the networking giant takes a hit due to outside economic forces, observers become nervous that other tech companies may follow.
The first question to Chambers during the call was about whether Ciscos current-quarter projections, and what executives are hearing from customers, signaled a coming economic downturn similar to the global recession seen several years ago.
When I talk to our customers, they do not see that occurring in their environment, and they traditionallyeven the areas that have been going slow like service providers and also the financial services industry grouphave said their plans are to spend more in the second half of the year, Chamber said. However ¦ in the very next sentence, they said, We are waiting to see what happens in Europe and what happens with government policy.
The economic troubles in Europe have been a concern for more than a year, and recent election results in Greece and Francewhere voters brought in new leaders who object to budget-cutting austerity measures in hopes to staving off another recession in the Eurozonehave roiled the waters in recent weeks.
Analysts with Jefferies and Co. noted that Cisco executives are executing well on their corporate strategy, but the companys fortunes are still tightly bound to the health of the global economy.
The magnitude of the weak Q4 guidance was surprising, the analysts said in a May 10 research note. It reminds us that, while Cisco is executing rather well, the business remains highly correlated with the ebbs and flows of the global macro-economy. Europe is clearly deteriorating.
The Magnitude of Ciscos Weak Q4 Guidance Surprised Analysts
In addition, the forecast from Chambers and other Cisco officials should be viewed as caution for what lies ahead, they said.
The spending environments remain very tepid with regards to Enterprise IT spending, Public Sector, and of course, Europe, the analysts wrote. We note that Ciscos comments are driven not just by Q3 orders, but more significantly, by their sales pipeline analysis, which is even more forward-looking.
Chambers said what enterprises are doing is looking for certainty in very uncertain times, and to some extent, that is impacting their spending. Customers are telling Cisco that they expect to spend more on IT in the second half of the year than the first, but that events globally will impact their eventual decisions.
[T]he tangible proof [of more second-half spending] is the customer saying it, but you need to know that if the situation in Europe begins to get really hard or the global environment gets softer or some of these governmentswhether it’s in India or Argentina or the U.S. or in the five or six major leading countries in Europedont resolve some of the issues, then I think people are in this uncertain environment and when they’re uncertain, unfortunately, you don’t spend, Chambers said.
Despite the global economic situation, analysts said operationally, Cisco is doing well. Scott Dennehy, an analyst with Technology Business Research (TBR), in a May 9 research note pointed out the companys strengths in its next-generation efforts, in such areas as wireless, video, data center and service, though its routing and collaboration businesses saw flat revenue. The relatively flat networking numbers echoed what rivals like Juniper Networks have seen in terms of spending by service providers, enterprises and governments, Dennehy said.
However, Ciscos brand position, its ability to provide end-to-end solutions, as well as its laser-sharp focus on its key markets (e.g., routing/switching, cloud, video, etc.) will continue to drive the companys revenue growth and profitability forward and insulate it from major shifts in customer-spending patterns, he wrote.