Cisco revenue forecast disappoints, hurt by networking shift

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(Bloomberg) -- Cisco Systems Inc., the biggest maker of equipment that runs the internet, gave a disappointing sales forecast that underscores the challenges facing its multibillion-dollar hardware business during an industry shift toward cheaper, software-based networking.

Revenue in the current period may decline as much as 6 percent from a year earlier, the San Jose, California-based company said Wednesday in a statement. That indicates sales of as little as $11.9 billion, far short of the average analysts’ projection of $12.5 billion. Cisco also said it’s cutting an additional 1,100 jobs on top of the 5,500 it announced in August. The shares tumbled in late trading.

Chief Executive Officer Chuck Robbins is trying to recast Cisco as a provider of networking services, seeking to reduce its dependence on hardware by offering more software and cloud-based products that provide predictable revenue. During the transition, the company faces slowing demand for the high-priced combinations of hardware and software that make up the bulk of its business, in part because corporate customers have been spending less on in-house data centers.

“They’re fighting some headwinds in their traditional products," said Erik Suppiger, an analyst at JMP Securities. Suppiger, who has the equivalent of a hold rating on the stock, said he doesn’t think Cisco can return to higher rates of overall sales growth in the next couple of years. “It’s not a very quick transition.”

Cisco shares fell as much as 8.6 percent in extended trading following the announcement. Earlier, the stock had slipped 1.4 percent to $33.82 at the close in New York, amid a broad market decline. The shares are up 27 percent in the past year.

Acquisition Strategy

Robbins has been making acquisitions to arm Cisco with new capabilities for the shift to software and services. Earlier this month, he agreed to spend $610 million to buy startup Viptela, which will add products to help companies such as Verizon Communications Inc. offer software-managed networking services over long distances.

Cisco, which has $68 billion in cash, is also open to making much larger acquisitions if that would help its transition, Robbins said in an interview.

“We’re not religious about potential size if it makes sense for us strategically,” he said. “We’re open to all alternatives. You can assume that we’re looking at those on a pretty regular basis.”

Companies are ordering less equipment for installation on their own premises, according to Raymond James & Associates analyst Simon Leopold. Technology providers such as Intel Corp. have reported a continuing slowdown in demand from corporate buyers, traditionally one of their biggest customer groups, as they outsource more of their computing to cloud providers such as Amazon Web Services.

‘Committed’ to Future

Robbins is working to restore the kind of growth that made Cisco one of the world’s largest companies. The networking-gear maker hasn’t reported an annual revenue gain of more than 10 percent since 2010. Sales have declined from a year earlier for the past six straight quarters. Last year, the company said it was trimming its workforce by 7 percent in a restructuring aimed at chasing faster-growth markets.

“We take every quarter seriously, but quarters come and go,” Robbins said. “We have to remain committed to the core elements of what we think is going to be important to the future of Cisco three to five years from now.”

Profit before certain items in the third quarter, which ended April 29, was 60 cents a share. Sales fell less than 1 percent to $11.9 billion, Cisco said Wednesday in a statement. Analysts on average projected profit of 58 cents a share on revenue of $11.9 billion, according to data compiled by Bloomberg.

Sales in Cisco’s biggest business, switching, rose 2 percent in the third quarter to $3.49 billion. Revenue from routing, the second-largest unit, dropped 2 percent to $2.03 billion. Collaboration, which includes videoconferencing, fell 4 percent to $1.02 billion, and data-center sales declined 5 percent to $767 million.

Cisco said orders in the U.S. have weakened as government-related agencies hold off on purchases because of uncertainty about their budgets. Emerging markets and service-provider spending remains subdued, and in the U.K., the weakness of the pound versus the dollar is hurting sales, the company said.

Net income in the fourth quarter, which ends in July, will be 46 to 51 cents a share. On average, analysts project earnings of 53 cents on revenue of $12.5 billion.

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