Cisco sales forecast points to slower tech spending

A visitor walks past a Cisco advertising panel as she looks at her mobile phone at the Mobile World Congress in Barcelona.
A visitor walks past a Cisco advertising panel as she looks at her mobile phone at the Mobile World Congress in Barcelona.PHOTO: REUTERS

NEW YORK (BLOOMBERG) - Cisco Systems, the biggest maker of the equipment that's the backbone of the internet, projected sales and profit that indicate corporate spending on technology hardware is slowing.

Profit before certain costs in the period that ends in January will be 55 cents to 57 cents a share and revenue may decline as much as 4 per cent, the company said on Wednesday (Nov 16). Analysts projected profit of 59 cents a share and a 2 per cent increase in sales to US$12.1 billion, according to data compiled by Bloomberg.

The forecast signals the difficulties facing Chief executive officer Chuck Robbins as he seeks to recast Cisco as a provider of networking services amid tightening corporate purchasing. With switching and routing still providing the biggest chunk of its sales, Robbins is struggling to show growth as customers move away from the mix of fixed hardware and closed software that helped the company become dominant.

"When you have more economic uncertainty enterprises tend not to spend," said David Heger, an analyst at Edward Jones. The new businesses' contribution is "still not big enough and the transition can't move enough relative to the overall business."

Cisco shares declined as much as 5.4 per cent in extended trading following the announcement. The stock had gained 16 per cent this year to US$31.57 at the close in New York.

In the first quarter, which ended Oct 29, Cisco's net income was US$2.3 billion, or 46 cents a share, from US$2.4 billion, or 48 cents, a year earlier, the company said in a statement. Sales rose 1 per cent to US$12.4 billion. Excluding some costs, profit was 61 cents a share, compared with analysts' estimate of profit of 59 cents on revenue of US$12.3 billion.

Sales in Cisco's biggest business, switching, declined 7 per cent to US$3.7 billion from a year earlier. Routing, the second-biggest unit, was a stand out with a revenue increase of 6 per cent to US$2.09 billion.

Highlighting Robbins' task, revenue growth has dried up since 2010 when Cisco reported a 19 per cent increase. For the second quarter, the company projected sales will decline to a range of US$11.36 billion to US$11.6 billion, based on adjusted revenue of US$11.83 billion in the quarter a year earlier.

Some investors no longer expect top-line expansion from the company and are holding the stock based on its ability to generate cash and return that to investors.

Cisco's backers also like its ability to maintain high-levels of profitability, even amid more difficult market conditions, said Brian White, an analyst at Drexel Hamilton They're also looking forward to a possible lower tax rate on repatriating overseas corporate earnings, he said. That would give Cisco the opportunity to bring home more than US$50 billion it has parked outside of the US, White said. That cash influx would help boost dividend payments and stock repurchases.