Cisco Outlook: A Bellwether or A Cisco Problem?

(Reuters) – Cisco Systems Inc’s (NASDAQ:CSCO) reliance on government spending for a big piece of its business was seen as a good thing — until governments stopped spending.

Now, a sudden crunch in spending by debt-burdened European nations and U.S. state and local governments is partly to blame for a bleak forecast that rocked global markets.

That spending slowdown has come as Cisco has expanded beyond its traditional network equipment business into everything from video cameras to computer servers, and raises concerns that the company is neglecting its main business.

The results speak more to problems at Cisco than the entire technology industry, some analysts said.

"It does seem somewhat Cisco specific," said Morgan Stanley analyst Ehud Gelblum.

"We believe the order shortfall could be more than the ‘air pocket’ described by (CEO John) Chambers, and instead could be the first signal that Cisco is losing share in some of its core markets as its focus on growth has diverted attention from its core businesses."

Cisco shares fell 15 percent to $20.90 in morning trading on Thursday after the company’s weak sales forecast announced a day earlier.

Investors and analysts said the slowdown was puzzling because other tech companies’ forecasts pointed to a recovery.

Cisco is the world’s top manufacturer of routers and switches that direct Internet traffic. Customers include a range of corporations including most major global phone and cable companies and a variety of government agencies.

To preserve double-digit revenue growth, Cisco has ventured into new areas, developing videoconferencing products and buying consumer products companies, including the maker of the Flip video camera.

Chambers said orders in the fiscal first quarter ended October 30 were below initial, internal estimates by over $500 million. As a result, he forecast revenue to grow just 3 to 5 percent in the second quarter, short of Wall Street’s expectations for 13 percent growth.

That was a big disappointment for a company known for solid management, and seen as a top beneficiary of the surge in global wireless and Internet traffic. Options volume on Cisco soared on Thursday, and was four times the usual volume as of mid-morning.

It was also the second quarter in a row that Cisco gave a weaker-than-expected outlook.