More Hurt Likely in Cisco’s Second Quarter
Cisco Systems PR
Prepare for more bad news from Cisco Systems when it reports its quarterly earnings after the markets close later today. The company continues to be whipped by sluggish sales in emerging markets and a broader slowdown of its core networking products business.
After last quarter’s earnings report, when the networking giant issued a surprisingly bleak outlook given weak sales in China other markets, Cisco appeared to be spinning its wheels. Its shares fell 11 percent on Nov. 14 and still haven’t recovered to the levels it traded at before that report.
Sanjiv R. Wadhwani, an analyst at Stifel, wrote in a note to clients issued Feb. 9 that he expects Cisco to report a decline in sales of between eight percent and 10 percent. He blamed “emerging market headwinds” and lukewarm sales of the company’s primary product, data center switches. On top of that, he also writes that Cisco may have ceded some market share in another key segment, routing, to Juniper Networks. “Our checks show that Juniper is faring better than Cisco,” he wrote.
Business is especially weak in emerging markets like China and Brazil, where Cisco derives about 22 percent of its revenue; with the economies of those countries weakening, Cisco’s results are likely to suffer along with them, Wadhwani wrote. From the quarter ending last April to the quarter ending in October, Cisco swung from a 13 percent rise in sales to Russia and Brazil, to a 21 percent decline.
Finally, Cisco may be hurting itself in the short term in order to make a bigger bet in the long term. Last year Cisco spent $863 million to acquire startup Insieme that specializes in software-defined networking. Switches that work on SDN allow for the creation and reconfiguration of networks in software without the need for any changes to hardware. It’s seen as a fundamental shift in the way data center networks are built, but it is still in its early stages. Many Cisco customers, Wadhwani says, may be holding back on buying traditional Cisco switching gear while evaluating Insieme products. “Our initial checks on Insieme evaluation have been lukewarm, with some confusion perhaps related to how early Insieme was announced prior to availability,” he wrote. He expects the situation to persist until the middle of this year.
Analysts polled by Thomson Financial expect Cisco to report earnings per share of 46 cents on sales slightly above $11 billion. Wadhwani says he also expects conservative guidance for the April quarter that may even fall short of the current consensus view of 48 cents a share on $11.3 billion in sales. The good news, he says, is that Cisco will hold a tight rein on its expenses in order to limit the damage to its overall earnings performance.