As chairman and CEO of a $43 billion global company, John Chambers talks regularly with other high-tech executives to gain a better view of the world economic environment and the potential impact of it on their businesses.
Right now, the top boss at Cisco Systems Inc.
(Nasdaq: CSCO) doesn't very much like what he is hearing from colleagues, business customers, and rivals. Chambers is also not hesitant to speak his mind about this to investors, customers, government officials, and anyone else who might be interested in his opinion. The CEO's blunt talk, however, is contributing to the pounding Cisco is taking on the equity market one day after announcing its latest quarter results. Today, Cisco's shares have fallen about 9 percent in early trading, despite the strong results announced by the company on Wednesday.
Investors, it appears, were impressed but not satisfied with either the 20 percent increase in Cisco's net income for the fiscal third quarter ended April 28, or the 7 percent jump in revenue from the comparable year-ago period. Shareholders were more focused on the company's weak financial outlook, itself a reflection both of what they can expect from Cisco and other high-tech companies, as well as what this means for other segments of the global economy.
A review of Chambers's comments during the company's conference call with analysts demonstrates why the market became nervous. The Cisco CEO said he and other high-tech executives are concerned about conditions in Europe, persistent uncertainty in global economic conditions, cutbacks in public spending, and the reluctance of enterprises to write big checks for infrastructure and other capital projects. Chambers further said:
We are still in an uncertain environment economically and in global perspective. We continue to see the impact of the areas of concern we have discussed for the last few quarters. We are seeing larger -- longer sales cycles, more sign-off and smaller deal size. Again, this is in terms of a more cautious environment and uncertainty from a CEO perspective.
When I talk to my peers in the industry -- make no mistake, I've been doing that; we can almost finish each other's sentences on what we're seeing around the globe from the enterprise customers. Again, not a view that things are turning down, but just very steady improvement and an uncertain and cautious wait-and-see type of environment from that perspective. We do worry when you see a trend occurring that it can be an indication of a bigger issue.
I think right now I'd classify it as uncertainty and looking to see more certainty on the global economy and in Europe and secondly, more certainty in terms of government policies that can have major impacts on their business. So it's a nice way of saying that we're not sure. We sure don't like the trend in the enterprise IT spending.
Chambers had documented his concerns previously. He identified Europe as a nagging concern for many in the high-tech community but also mentioned the cuts in public sector spending, "conservative IT" spending, and undefined issues with India. "Each of these has proven to be a challenge as we anticipated, and several -- Europe and customer conservatism -- have gotten worse," he said.
If only Cisco alone was being affected by these problems or that they were being quickly resolved. That's not the case. In fact, the fiscal mess in Europe that has engulfed Greece, Ireland, Italy, Portugal, and Spain has fueled the spending conservatism at the enterprise level referenced by Chambers. With Greece still struggling to set up a new government and now on the brink of crashing out of the euro currency zone, more businesses will worry about the snowballing effects on their operations and cut back on capital expenses.
So far, the impact of all this on the consumer electronics sector has been minimal. I expect consumers in non-euro countries and even in a few stable euro countries to stay detached from events in Greece. But the failure of the European Union to end the image of a continent adrift is certainly a cause for concern in more corner offices than just those at Cisco.