At Cisco, Macroeconomic Reality Bites

john_100x100_110508The stresses of the global economic system are catching up with technology companies. Cisco Systems (s CSCO), which till recently was confident of its future fortunes, has lowered expectations for the coming quarters after posting as-expected results for the first quarter of 2009 ended Oct. 25. (Revenue for the quarter was $10.3 billion, roughly an 8 percent year-over-year increase. Cash generated from operations was $2.7 billion and earnings came in at $2.2 billion, or about 37 cents a share.)

How bad is the situation at Cisco? Orders went from being up 7 percent in August to down 9 percent in October, prompting the company to start talking about 5-10 percent declines in revenue for the January 2009 quarter. Even their book-to-bill ratio, a key measure of future health, dropped below 1.0 to around 0.9. CEO John Chambers and CFO Frank Calderoni addressed the issue of the downturn at length on their conference call with Wall Street analysts.

Over 70 percent of our business comes from the U.S. and Western Europe today. Both experienced negative year-over-year order growth in Q1. We are seeing customers, not just in the financial, automotive or retail sectors, but across most of our enterprise industries facing what they view as a very challenging business environment. This started in the U.S., it then in our opinion, expanded to Europe, then to emerging market theater, and now to Asia. (CFO Frank Calderoni – CFO)

No wonder some analysts are planning to cut their revenue estimates for Cisco by between 4 percent and 9 percent for 2009. However Chambers says Cisco intends to “invest aggressively in two geographies: the U.S. and selective emerging countries.” Why? “In our opinion, the U.S. will be the first major country to recover. The strategy on emerging countries is simple. Over time we expect the majority of the world’s GDP growth will come from the emerging countries.” Interestingly, the company noted that the number of inquires for vendor financing from Cisco Capital had increased, but the company is still playing tough.