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Cisco: Global Uncertainty Worries High-Tech

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 {complink 1131|Cisco Systems Inc.} 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.

19 comments on “Cisco: Global Uncertainty Worries High-Tech

  1. ahdand
    May 11, 2012

    It is a common factor now but that doesn't mean you can ignore everything

  2. stochastic excursion
    May 11, 2012

    I'm surprised that with the IPv6 transition starting to pick up steam, there's not more confidence in Cisco acquiring more value in the near future.  This is a sign that the financial industry is throwing a damper even over businesses that should have a successful outlook.

  3. Anand
    May 11, 2012

    I think one of the reason for such a   sharp fall is investors are bearish about the IT sector after the Cognizant reported bad set of numbers. I read somewhere that for the first time since the Lehman Brothers crisis, the Cognizant has lowered its forecast for the full year, largely on account of financial services clients in North America.

  4. elctrnx_lyf
    May 11, 2012

    May be it always works in a chain. Once people become conservative it has effects on big financial institutions followed by IT companies and software institutions who are back bone of the banks solutions. This will be followed by lowering infrastructure investment and will impact companies like Cisco significantly. This may not be situation with other industries like energy.

  5. Wale Bakare
    May 11, 2012

    It is very difficult to predict better future now with the financial crisis signs too gloomy. With that, many things are suffering in making it to the light of the day. And another reason for Ipv6 not boosting Cisco's future – not enough awareness and education towards migration and deployment of version 6 internet protocols.

  6. SunitaT
    May 12, 2012

    Cisco is facing stiff compeitition from companies like Huawei. Huawei    was earlier selling infrastructure to U.S. telecom operators but now it aims to provide equipment to large businesses, a market dominated by Cisco Systems. Needs to be if Cisco can stop the Huawei from capturing its market.

  7. t.alex
    May 12, 2012

    Even end consumers hardly use Cisco routers at home nowadays. They have so many choices.

  8. itguyphil
    May 12, 2012

    I think there is still a fear/indecision among many organizations about how the switch the v6 will affect their environments. Although most newer devices over the past few years have the capability, most will stick with v4 until they are forced to make the change.

  9. Wale Bakare
    May 12, 2012

    Totally agreed. Cisco market share portion is being cut holding by Huawei. Huawei has been growing rapidly even in Africa market predominately of Cisco in the last few years. Compounding market situation for Cisco – ZTE another emerging big thing forcing its way to developing markets. Also we need to bear in mind that startup techies & small and medium enterprises are also cutting back on hardware expenses or alternatively shopping for low end hardware stuffs. How best do you think Cisco can stop Huawei in particular?

  10. Wale Bakare
    May 12, 2012

    Yes, force will come in after exhausting v4. But why should organizations fear of switching to adoption of new technologies. Fear of complexity, compliance or auto-configuration & addressing of v6?

  11. Wale Bakare
    May 12, 2012

    How would Cisco fair in crowding area of cloud computing market? Had Cisco acquired Skype talk instead of WebEx communications that would have probably contributed  to its market base better in consumer market. What do you think?

  12. t.alex
    May 13, 2012

    I can see ipv6 is slowly and very slowly coming into organizations via new equipment or device upgrade. Top level management hardly make any decision to abruptly switch to ipv6.

  13. ahdand
    May 15, 2012

    I think this downturn pattern is causing many issues to lots of basically every industry.

  14. itguyphil
    May 15, 2012

    I wouldn't necessarily say it's the fear of adopting v6. It is a hesitance to change what already works. I think the best strategy would be to build it in house in a sandbox and see the ramifications prior to pushing the changes live. Then it will also give an idea of any mandatory/recommended equipment upgrades needed.

  15. Mr. Roques
    May 15, 2012

    Do you believe Cisco is only concerned about the demand side of the equation? or do you think there's more competition in the supply part? — for years Cisco has been buying itself out of trouble (M&A's of smaller firms). Do you think that will stop or has stopped?

  16. ahdand
    May 29, 2012

    Roques: Well thee is definitely more compition in the market but the only issue is that they have not been highlighted properly.

  17. Mr. Roques
    July 11, 2012

    In networking, as long as CCNA/CCNP/etc continues to be a standard, they will continue to dominate. Companies build engineers and technicians and they would probably try to avoid big changes that would disrupt that investment they made.

  18. ahdand
    July 14, 2012

    Yes as long as networking is done properly it wont be much of an effect but the upgrades have to be considered very clearly

  19. Mr. Roques
    August 25, 2012

    I didnt understand. I was saying that when they have invested so much in training and HR, changing systems would be too costly.

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