Weak Cisco forecasts highlight fears of sudden slowdown
The resilience of corporate spending on IT equipment in the face of geopolitical and economic uncertainty has started to crack, to judge by a sudden downdraft in orders at Cisco Systems.
The networking equipment maker issued a weak forecast for its latest financial quarter late on Wednesday, after a day in which US share prices had shuddered over worries about a weakening global economy. After dropping 4 per cent in normal trading, Cisco’s stock tumbled another 7 per cent in after-market trading to $46.66.
Falling demand in the UK, Cisco’s second-biggest market after the US, was the single biggest factor in declining orders from big corporate customers, Chuck Robbins, chief executive, said in an interview with the Financial Times.
Cisco’s orders from these so-called enterprise customers fell 2 per cent globally in the latest quarter, with all the decline accounted for by the UK, he said. Mr Robbins added that it was too early to say if this was a phenomenon of the latest quarter or whether worries about Brexit would have a longer-lasting impact.
Cisco has become a barometer of broader corporate confidence as the proportion of its sales coming from large companies around the world has risen. With a fiscal year ending in July, it also reports figures a month later than other big IT companies, providing a more up-to-date view of conditions as economic uncertainty has risen.
Beyond specific issues like Brexit, Mr Robbins said that the company had seen some “slight early indications of some macro shifts” during the month of July as it closed fewer new orders than expected. That was particularly noteworthy since the most recent quarter was the last of Cisco’s fiscal year, typically its strongest sales period.
“It just didn’t feel like a normal [fourth quarter] finish and it felt like some of the macro issues could be manifesting themselves,” Mr Robbins said.
His caution was noteworthy after a series of quarters in which Cisco has bucked political headwinds like the US/China trade war and uncertainty over Brexit.
Its revenue, adjusted for the sale of a division, grew 7 per cent in the year to the end of July, its strongest growth in eight years.
For the current quarter, by contrast, the company said it expected sales growth of 0-2 per cent, compared with Wall Street expectations of 2.5 per cent, and it issued weaker than expected profit guidance.
While the downturn in orders from enterprise customers caught investors’ attention, other factors also weighed on Cisco’s downbeat forecast. For instance, new orders from telecoms service providers tumbled 21 per cent in the latest quarter, reflecting a long-running slump in business from these customers.
China also dented Cisco’s prospects, even though Mr Robbins said it now only accounted for about 2 per cent of the company’s sales. Kelly Kramer, chief financial officer, said sales in China had fallen 25 per cent in the latest quarter, and weaker orders from Chinese companies had accounted for half the overall decline of 2 per cent in enterprise orders for the period.
Cisco’s solid performance so far in 2019 was confirmed on Wednesday as it reported revenue growth of 6 per cent in the three months to the end of July. At $13.4bn in revenue and pro forma earnings per share of 83 cents, its quarterly performance was slightly ahead of Wall Street expectations.