Cisco Foretells Challenges to Global Market

Cisco Systems Inc. (Nasdaq: CSCO) shares fell sharply -- about 9% in after-hours trading on Wednesday -- after the company announced earnings that basically met expectations and issued conservative financial guidance.

Cisco is often looked to as a bellwether for the markets and the global economy, and its message was not an especially bright one. The company's continued conservative financial guidance and guarded comments about the global economy will lead to further investor concern that the global financial crisis is rearing its head again.

For the company's third fiscal quarter, Cisco announced GAAP earnings per share of .40, a 21% increase over last year, and .48 cents in non-GAAP earnings. Expectations were for .39 in GAAP and .47 in non-GAAP.

The company reported net revenue of $11.6 billion, an increase of 7% year-over-year and the same as consensus expectations, and it booked net income of $2.2 billion GAAP (increase of 20% year-over-year) and $2.6 billion of non-GAAP income (increase of 11% year-over-year).

In a conference call, Chambers said that a conservative global economic outlook was warranted given a cautious business climate and worries about the European economic crisis.

The company said it expects non-GAAP revenue growth to be 2% to 5% on a year-to-year basis for its fourth fiscal quarter. It expects non-GAAP gross margin 61% to 62% and earnings of .44-.46 cents per share for the next quarter, up 10% to 15% year-over-year.

"After the intensive work last year, the parts of our business we can control are healthy," said Chambers. "We are still in an uncertain environment economically globally. Europe and the global economy, public sector, and India [continue to be a challenge]. In each of these areas, especially Europe, customer conservatism has gotten worse."

However, Chambers said the economic slowdown has not yet reached a critical stage. "At this time we are not seeing a significant downturn in the environment." He said generally the company is seeing longer sales cycles and smaller deal sizes.

"It looked like they were being conservative in guidance last quarter but nobody believed them," said Edward Zabitsky, an analyst with ACI research. "It looks like it was true."

Zabitsky said one drag on Cisco's growth might be the distribution of revenue recognitions on routers sold in Asia. "There was a big core router contract from China that was recognized over two quarters and that made for some bad comparisons," said Zabitsky.

Of course there were some financial bright spots for Cisco. Its earnings and revenue both represented new records: $48.4 billion at the end of the third quarter of fiscal 2012, compared with $46.7 billion at the end of the second quarter of fiscal 2012.

CFO Frank Calderoni said the company will continue to "support the dividend" and look at ways to potentially increase it. He pointed out that only $6 billion of Cisco's cash is in the United States, limiting the potential for the cash to be distributed (the company would have to repatriate and pay tax on the bulk of its cash, which it holds overseas).

Generally, Cisco said that cloud computing, social networks, Internet video, and mobile device proliferation are the strongest trends in the industry. The company said it sees an "acceleration" of activity in datacenter build outs.

The company also saw strong growth in the wireless business, with wireless orders growing 19% year-over-year, said Chambers. It's ASR 5000 wireless networking business was very strong, with orders growing well over 100%.