Cisco Sales Forecast Falls Short as Carriers Cut Spending

By Peter Burrows

Cisco Systems Inc. (CSCO)’s profit and revenue forecasts fell short of estimates as U.S. phone carriers cut spending, putting pressure on the company to deliver on its plan to sell more software-based networking systems.
Sales will climb 4 percent to 7 percent in the quarter ending in January, the company said yesterday, while analysts were projecting on average growth of 8 percent, according to data compiled by Bloomberg.
Cisco has struggled as customers shift toward software based networking and gotten away from the expensive hardware it pioneered. In August, the San Jose, California-based company said it would eliminate 6,000 jobs, as Chief Executive Officer John Chambers works to
remake Cisco before leaving it in the hands of a successor.
“The revenue guidance they’ve given is pretty close to the company’s revenue in January 2012,” said Alex Henderson, an analyst at Needham & Co.
Two or three large phone companies “dramatically slowed their order rates, and I mean dramatically,” Chambers said on a conference call. The forecast for this quarter is conservative because of the likelihood of further declines, he said.
Still, Cisco has turned the corner in acceptance for new products and services designed for a software-oriented world, Chambers said.
“I give us very high marks on our execution,” Chambers said on the call.

New CFO

Frank Calderoni, Cisco’s chief financial officer, will step down effective Jan. 1, the company said. Cisco said it plans to appoint Kelly Kramer, senior vice president of business technology and operations finance, to succeed Calderoni, who said he’s leaving after a “good run” of seven years and looking to do something new.
Profit, excluding some items, will be 50 cents to 52 cents a share, short of analysts’ prediction for 53 cents, Cisco said.
Cisco shares fell 1.4 percent in extended trading, after closing in New York at $25.11. The stock is up 12 percent this year, compared with a gain of 10 percent in the Standard & Poor’s 500 Index.
The company also reported profit, excluding some items, for the period ended Oct. 25 was 54 cents a share, topping analysts’ average estimate of 53 cents, according to data compiled by Bloomberg. Revenue rose 1.3 percent to $12.2 billion, matching analysts’ projection.

Spending Environment

First-quarter net income fell 8.4 percent to $1.83 billion from $2 billion a year earlier, the company said in a statement yesterday. Gross margin, a measure of profitability, was 60 percent in the period.
Cisco is facing reduced spending from some phone companies, with its earnings coming days after AT&T Inc. lowered its capital spending outlook for 2015 by 14 percent to about $18 billion. AT&T’s plans signal that phone companies are finding ways to build their networks using sophisticated software running on industry-standard computers, rather than on the highly profitable and specialized networking gear sold by Cisco. AT&T’s plans signal that phone companies are finding ways to build their networks using sophisticated software running on industry-standard computers, rather than on the highly profitable and specialized networking gear sold by Cisco.

New Networks

The approach, dubbed Network Function Virtualization, lets customers strip out key features of specialized hardware, such as firewalls and load balancing algorithms, and instead get these capabilities through stand-alone software programs. The market for products for NFV and a related, smaller trend called software-defined networking is projected to grow to more than $11 billion in 2018 from less than $500 million in 2013, according to Infonetics Research.
Cisco rivals are also struggling with the shifts in the networking industry. Last month, Juniper Networks Inc. trimmed its sales projection for the next few quarters because of slower carrier spending. Earlier this week, Juniper CEO Shaygan Kheradpir resigned after less than a year on the job following a board review of his conduct with a customer negotiation.