At Cisco, Macroeconomic Reality Bites

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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.

8 Comments

anonymous

Chambers said the same thing in 2001 and got a 7 year extension to improve things ….But where is the growth? Stock did not do great either. Cisco lost key execs in 7 years …time to get some young blood in there for the 2.0 and 3.0 world.

Manish J.

If all you have is a hammer everything is a nail. With this economic downturn, I’m guessing people will downgrade their internet service and go for something cheaper at the moment. But then again people might ditch their cable providers and download the content (ex. HBO’s Entourage).

@Larry L.
“Enterprises are out to save money, the quickest way to reduce spend is Travel, its immediate and easily measured. Every 1 week trip you save in the US (approx $1800), not including lose of productivity while traveling”

The big assumption with the above statement is that there are deals in play and a need to travel.

Om Malik

@Doug Mohney

Amen Amen to that… seriously I believe there is a whole bunch of people who have built their business on too much optimism. I am worried that we are seeing a big swing in the sentiment —

Larry L

I don’t agree with you, I do believe Cisco will under preform as whole, but I also think Video will be very big.

Enterprises are out to save money, the quickest way to reduce spend is Travel, its immediate and easily measured. Every 1 week trip you save in the US (approx $1800), not including lose of productivity while traveling.

Will it push the Bandwidth and network gear, not really, the only network gear push I see is new and consolidated data centers.

Doug Mohney

Chamber’s sunny optimism rule – “When Chambers predicted growth, it’s not coming.”

January this year, video was going to be the driving force for happiness, love, and more gear.

In dot.com, bandwidth rates were going to double and double and Cisco would grow FOREVER…. until it turned to dot.bomb.

Deja vu, anyone?

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