Cisco's Quarter Forecast Chills Tech Market

By Reuters

NEW YORK, Nov 10 (Reuters) - Top network equipment maker Cisco Systems Inc (NASDAQ:CSCO) gave a dismal revenue outlook, stunning investors who had hoped to see proof of a recovery in technology spending, and sending major tech stocks tumbling after-hours on Wednesday.

Forecasts for quarterly and yearly revenue fell far short of Wall Street's expectations, 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.

"It was a surprising guide down," said Jefferies & Co analyst William Choi. "They're a well run company, well respected, they typically set guidance and meet. For them to guide down like this is puzzling."

John Chambers, one of the longest-serving CEOs in Silicon Valley whose views on economic trends are well regarded, cautioned of "short-term challenges" in Europe and public sector spending, as well as among its most important customer segment: service providers.

"First of all, our view on this guidance is, we are disappointed," he said.

Chambers forecast revenue growth of 9-12 percent in fiscal 2011, well below the 13.1 percent analysts had expected on average.

A projection for 3-5 percent revenue growth in the fiscal second quarter -- the current period -- also fell far short of Wall Street's expectations for 13 percent.

The outlook from the tech-sector bellwether sent shares in fellow industry heavyweights down in extended trading. Microsoft Corp (NASDAQ:MSFT) fell 1.6 percent, IBM (NYSE:IBM) slipped 1.2 percent, and Intel Corp (NASDAQ:INTC) dropped 2.1 percent.

"We are obviously not projecting growth as fast as we would like over the next several quarters," Chambers told analysts on a conference call. He said it "reflects, in our opinion, the reality in public sector spending, some challenges in parts of our service provider market, and one or two areas we should improve our execution."

While Cisco has a good track record of beating Wall Street's expectations, it wouldn't be the first time its outlook and CEO's comments spooked the market.

Chambers' warning last quarter about "unusual uncertainty" among customers had also sparked a sell-off.

Cisco's customers, who cut back during the recession, have recently begun spending more on their network infrastructure, with phone companies buying more advanced equipment to handle growing smartphone traffic and corporate clients upgrading their data center equipment.

But the pace of recovery has been in doubt, with both companies and government agencies trying to control their costs by trying to do more with less.

Cisco said revenue in the fiscal first quarter ended Oct. 30, rose 19 percent from a year earlier to $10.75 billion. That was roughly in line with the market's average forecast of $10.74 billion, according to Thomson Reuters I/B/E/S.

But orders in the quarter, an indicator of sales in the coming quarters, were lower than initial estimates by over $500 million, Chambers said.

"We did see several challenges in the quarter, as you would expect given some of the numbers we discussed," he said. "These areas include certain categories of our public sector segment, certain product in our service provider segment, and to a limited extent, Europe, in terms of business momentum."

But the company, as usual, managed to limit the impact on its bottom line for the first quarter. Net profit rose to $1.9 billion, or 34 cents a share, from $1.8 billion, or 30 cents a share, a year earlier. Excluding items, earnings per share rose to 42 cents, beating Wall Street's expectations by 2 cents.

Shares of the company crumbled to $21.15 in after-hours trade. They had gained around 20 percent since hitting a year's low at the end of August, as the tech sector rallied on hopes of a recovery in spending. (Reporting by Ritsuko Ando and Edwin Chan; Editing by Bernard Orr)

This article was originally published on 2010-11-10