Cisco Says U.S. Economy Hurt Sales
Cisco Systems Inc.’s business in January was slow as a U.S. economic slump prompted customers of the world’s largest Internet equipment maker to reduce spending, Chief Executive John Chambers said Sunday, adding that the range of estimates for the company’s fiscal-year growth should be wider than previously expected.
“Business in January was a little bit slow,” Chambers said in a briefing for journalists during the annual meeting of the World Economic Forum. “The business momentum of most of my customers was very tough in December and equally tough in January.”
In recent months, several Cisco rivals, including Foundry Networks Inc. and Efficient Networks Inc., lowered profit and sales forecasts or fell short of expectations as spending for telecommunications services and equipment slowed.
“This is a message,” Sanford C. Bernstein & Co. analyst Paul Sagawa said of Chambers’ comments. “He’s saying that right now Cisco sees slower demand, and that it’s quite possible that in the next few quarters they’ll fail to meet their growth goals.”
Chambers told journalists that Cisco’s staff growth rate will slow dramatically in the coming months, and that the company may need to put off some expansion plans until the economic slowdown--which he said may be a “two-quarter phenomenon”--ends.
Chambers said Jan. 10 that the second quarter, which ended Saturday, was “a little bit more challenging” than expected, and that he was looking for a wider range of estimates from analysts. Cisco’s fiscal year runs from August to July. The company will report quarterly results Feb. 6.
The company’s shares have risen 6% since Jan. 10, closing down 94 cents at $38.38 in Nasdaq trading Friday. Expecting his comments to elicit a more negative reaction from investors, Chambers may have chosen Davos as a forum to further temper enthusiasm for Cisco’s results, Sagawa said.
On Sunday, Chambers said, “We’re going to get a pretty wide range of estimates in terms of what may occur in the market.” That range is going to be “wider than we said” in early January. He did not provide a target.
“They’re basically saying [to analysts]: Take your numbers down,” Sagawa said.
Chambers said, “I have said that in economies that are growing reasonably well, [Cisco] will grow 30 to 50%. In economies that slow, we will go below 30 to 50%. And we may go negative if it’s a slowdown that’s very rough, that lasts a long period of time.”
When asked whether that implies Cisco may miss its target this fiscal year, spokeswoman Abby Smith said, “You could infer that.” Chambers later said analysts expect the company to meet its target but declined to comment on his own expectations for this year.
“It’s a big enough company” to be affected by general economic trends, said CE Unterberg Towbin analyst Martin Pyykkonen.
Cisco’s staff growth rate will slow and the company may delay some expansion plans, Chambers said. “We will only start to grow staff after we see the economy in the U.S. coming back out,” he said. “We’re not cutting jobs.”
“We’re being a little more selective and more careful about head-count allocation with” plans for expansion, he said. “Maybe not try to run quite as fast, as early--or maybe say here is my target acquisition but do it one quarter later.”
“Are we being more careful about our expenses? Yes,” he said.
After Chambers’ January comments, made at the Morgan Stanley Dean Witter Internet, Software & Networking Conference in Scottsdale, Ariz., some analysts decreased their estimates for the company’s fiscal-year earnings.
Morgan Stanley Dean Witter & Co. analyst Chris Stix said he expected Cisco to earn 77 cents a share and have revenue of $28.6 billion in the fiscal year ending July 28, down from a previous forecast of 79 cents and $30 billion. Profit estimates from Wall Street analysts exclude acquisition and stock-option costs, investment gains and losses.
