Cisco Systems Inc. (CSCO.O) plummeted the most in almost six years after the company gave a lackluster sales forecast, indicating the U.S.-China trade dispute and a slowing global economy are leading customers to delay updates of their computer networks.
Chief Executive Officer Chuck Robbins is trying to turn Cisco into more of a software and services company, but the transformation is being stymied by the trade war and its impact on corporate spending. The company still gets the majority of sales from machines that are the backbone of the internet, making it an economic bellwether. The CEO said some customers are showing more caution because of escalating trade tensions.
“They’re just hedging their bets relative to some resolution on this stuff,” Robbins said. “We did see in July some slight early indications of some macro shifts that we didn’t see in the prior quarter.” Robbins said Wednesday.
Cisco shares declined 8.6 per cent to US$46.25 at the close in New York, the biggest single-day fall since November 2013. It was the worst performer Thursday on the Dow Jones Industrial Average. Even with Thursday’s drop, the stock has gained 6.7 per cent this year.
Cisco said sales in the fiscal first quarter will be flat to an increase of as much as 2 per cent from the period a year earlier. That implies revenue of as little as US$12.9 billion, compared with analysts’ average estimate of US$13.4 billion. Adjusted profit will be 80 cents to 82 cents a share, the San Jose, California-based company said Wednesday in a statement.
In the fourth quarter, which ended July 27, total orders were unchanged. Emerging markets bookings were down and the Asia Pacific region saw a decline of 8 per cent, Chief Financial Officer Kelly Kramer said on a conference call with analysts.
While Cisco gets less than 3 per cent of revenue from China, business there has dropped “dramatically,” Robbins said. State-owned enterprises and some Chinese telecom providers that had used small amounts of Cisco machinery are not interested in bids from the company amid the current trade tension, he explained.
Fiscal fourth-quarter net income fell to US$2.2 billion, or 51 cents a share, from US$3.8 billion, or 81 cents, a year earlier. Revenue was US$13.4 billion, a seventh quarterly expansion. Excluding certain items, Cisco posted profit of 83 cents a share, compared with the average analyst estimate of 82 cents, according to data compiled by Bloomberg.
Orders in the Americas and Europe increased, albeit slowly. Bookings from service providers, such as telecom and cable-TV operators, slumped 21 per cent, while government and commercial customers sought more gear than they had a year earlier, Cisco said.
Cable companies aren’t buying new equipment -- instead, they’re trying to wring as much life as they can out of their existing gear, Robbins said in an interview. The phone-service providers are spending on consumer 5G, or fifth generation, networks. These customers will shift investment to Cisco’s gear, which lives in their data centers, when they’re deploying business services on those new networks that require greater traffic management, he said.
Robbins said he sees little need for concern that the overall economy is about to drop.
“There’s a lot of geopolitical dynamics, and I’ve said multiple times that I’ve been shocked how well the macro has held up,” he said. “In most of the world it wasn’t terrible at all. I would not make it a broad-based assertion yet.”
In the recent period, Cisco’s hardware business generated sales of US$7.88 billion, a gain of 6 per cent. Applications, its software unit, was up 11 per cent at US$1.49 billion and security revenue jumped 14 per cent to US$714 million.
Cisco is the biggest maker of routers, switches and other gear used to connect computers. The company gets a tiny percentage of sales from China, where it’s been largely locked out of the market. Almost 60 per cent of revenue comes from the Americas region.
Under Robbins, Cisco has made a string of acquisitions to build a software and services business. Earlier this month, it announced plans to buy closely held Voicea, a maker of software that provides real-time transcription and voice search capabilities.
Cisco is still buying hardware companies, too. In July, it agreed to acquire Acacia Communications Inc. for about US$2.6 billion, gaining chips and machines that help translate optical signals into electronic data.