Cisco's Chambers: Cautious Customers = Fewer Orders

Economic concerns impacting U.S. and European customers have led to a slow-down in orders for Cisco Systems, the company's top executive said Wednesday.

Cisco met Wall Street analysts' expectations for the second-quarter, but an unexpected decline in January order growth, combined with "cautiousness" among Cisco's U.S. and European customers, led John Chambers, Chairman and CEO of the San Jose, Calif.-based networking vendor, to cut guidance for third-quarter revenue growth to 10 percent, down from expectations of 15 percent. Cisco's long-term guidance holds steady at 12 percent to 17 percent revenue growth.

"While we continue to be extremely comfortable with our vision and differentiated strategy for the value that intelligent networks will bring across all of our customer segments, we also see the economic challenges that the U.S. is experiencing," Chambers said, during a conference call. "Our customers in many emerging countries, especially in India, China and the Middle East, remain optimistic about their business momentum. However, we are seeing our U.S. and European customers become increasingly cautious."

For the second fiscal quarter, ended January 26, Cisco reported earnings of $2.06 billion, or 33 cents per share, up from $1.92 billion, or 31 cents per share, the same quarter a year ago. Revenue for the quarter hit $9.83 billion, up more than 16 percent from $8.44 billion a year ago.

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Excluding charges, Cisco earned 38 cents per share, matching analysts' estimates from Thomson Financial.

Overall, December was a strong month for Cisco orders, with year-over-year growth rates in the mid-teens. But January's order growth rate came in at approximately 10 percent, which was less than expected, Chambers said. That, plus uncertainties in the global market and cautiousness among customers and peers, leads Cisco to assume that January's growth rates might not be an aberration, and may continue for the next several months, Chambers said.

NEXT: Unified Communications Stays Strong

In the U.S., orders for the second quarter grew approximately 12 percent year-over-year. U.S. service provider orders grew approximately 13 percent year over year, including Cisco's Scientific-Atlanta business. Its commercial business grew 20 percent, including Cisco's WebEx and IronPort businesses. Its enterprise business, excluding federal, grew 11 percent. It was down slightly last quarter.

Cisco raised eyebrows on Wall Street when it reported that first-quarter U.S. sales to its largest enterprise accounts were down slightly. While U.S. enterprise sales among Cisco's largest customers rebounded in the second quarter, growing in the mid-teens, they still trailed growth rates of more than 40 percent for the same segment throughout the rest of the world.

Chambers said Cisco's product mix for the second quarter was well-balanced.

Router revenue for the quarter grew 18 percent year-over-year, switching revenue grew 11 percent and advanced technologies grew 25 percent.

Among its advanced technologies, unified communications grew 30 percent year-over-year excluding Cisco's WebEx conferencing services, which the vendor acquired in May. Including WebEx, Cisco's unified communications business for the quarter grew 60 percent year-over-year, Chambers said. Storage revenues grew 30 percent, wireless grew 10 percent, networked home was down five percent and security grew 12 percent.

Those five technology areas, which make up Cisco's first group of advanced technologies, together have a revenue run rate of approximately $7 billion, he said. Cisco's other newer advanced technologies -- a designation Cisco uses for technology areas it believes it can grow into $1 billion businesses -- including video systems, application networking services and hosted small business services, hit a $2.7 billion revenue run rate.

For the third quarter, Chambers said the company continues to see concerns over the U.S. economy and whether problems will spread to other geographies.

"If the market does continue to slow, we believe this will not dramatically change our long-term opportunities with our vision of how the industry will evolve and our differentiated strategy. In fact it is our intent to expand our market share during these corrections as we have done in the past," Chambers said. "As we have done again and again, we think we can gain more market share during the challenging times and estimate we can do that while maintaining our guidance on gross margins."

The company expects total gross margins for the third quarter to be approximately 65 percent.

While it is "probable" that Cisco will hit the lower end of its expected revenue growth range of 13 percent to 16 percent for fiscal 2008, the company decided not to provide guidance for the fourth quarter, said Frank Calderoni, who will replace retiring CFO Dennis Powell this month.