Government cutbacks rouse bleak forecasts from Cisco Systems

Nov. 11 (Bloomberg) -- John Chambers, chief executive officer of Cisco Systems Inc., discusses the company's revenue forecast reported yesterday and business outlook. The world's largest maker of computer networking equipment said revenue in the fiscal second quarter will be about $10.1 billion to $10.3 billion, falling short of analysts' estimates of $11.1 billion. Chambers talks with Betty Liu and Jon Erlichman on Bloomberg Television's "In the Loop." (Source: Bloomberg)
By Joseph Galante and Amy Thomson
Thursday, November 11, 2010; 8:48 PM

Disappointing sales and profit forecasts from computer-networking-equipment giant Cisco Systems show that cutbacks in government spending pose risks for companies that rely on the public sector for growth.

Governments in Europe, Japan and some U.S. states reduced orders as their budgets came under pressure, said Cisco chief executive John Chambers. State government orders fell 48 percent in the last quarter from the previous period, he said.

"We believe the public sector business will continue to be challenging for at least several quarters," said Chambers during a conference call late Wednesday to discuss the company's fiscal first-quarter results.

The challenges for Cisco, which gets about 22 percent of its business from the public sector, may signal broader risks for businesses that depend on government spending.

Technology, construction and health-care firms draw revenue from state and local governments, which reduced their spending in the third quarter and cut into U.S. economic growth.

Cisco estimated Wednesday that revenue in its fiscal second quarter will be about $10.1 billion to $10.3 billion, and earnings, excluding some costs, will be at most 35 cents a share. Analysts had projected sales of $11.1 billion and profit of 42 cents on average, according to estimates compiled by Bloomberg.

The forecast unnerved investors and sent Cisco shares tumbling on Thursday.

The stock plunged $3.97, or 16 percent, to $20.52 - its biggest drop since July 1994. The declines weighed heavily on Wall Street, with the Standard & Poor's 500-stock index falling 0.4 percent to 1213.54, and the tech-heavy Nasdaq slipping 0.9 percent to 2555.52.

Investors look to Cisco as a bellwether for the technology industry because the company dominates the market for routers and switches, products that direct the flow of Internet traffic. Companies buy its switches for corporate networks, while phone and Internet-service providers typically buy Cisco's more expensive routers.

Cisco's first-quarter earnings, excluding some costs, were 42 cents a share, while sales climbed 19 percent to $10.8 billion. Analysts surveyed by Bloomberg predicted profit of 40 cents a share on sales of $10.7 billion.

The report caps a quarter of earnings among corporate-technology companies that suggest the economy is struggling to recover quickly. Juniper Networks and International Business Machines Corp. both slid after earnings reports.

Cutbacks at the state and local level are starting to weigh on companies doing business with those governments. The slowdown in municipal and state expenditures is putting a bigger burden on private industries and consumers to spend at a pace that maintains the economic recovery.

Chambers said government demand varies by region. Spending by the U.S. federal government and public agencies in emerging markets remained buoyant, even as other entities held back.

"We're trying to get ahead in terms of our projections" for government spending, he said. "We were surprised at how quickly that dropped off."

- Bloomberg News

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