November 11, 2010 12:58 am

Investor fears hit Cisco shares

Cisco Systems’ share price dropped 14 per cent in spite of the technology company reporting better than expected first-quarter earnings as investors showed concern over the group’s direction.

Its lacklustre quarterly results, alongside lower revenue projections, left investors concerned that it was taking hits to its core business while continuing to chase after uncertain new technologies.

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Cisco, the world’s largest producer of computer-networking equipment, predicted 3-5 per cent revenue growth for the second quarter, falling short of Wall Street’s expectations for 13 per cent.

Company executives said that they missed their sales targets in the first quarter after a surprising drop-off in spending by public sector customers, especially European governments.

They also said they had been caught unaware by a fall in sales of set-top television boxes to US cable companies as Motorola gained share and big customers moved to internet-based devices. North American set-top box orders fell more than 40 per cent from a year before and executives said the trend would continue.

“We’ve got a couple of air pockets that we hit,” said chief executive John Chambers. “The big picture hasn’t changed.” But analysts pointed to revenue declines in areas such as security, where sales fell 2 per cent, as its competitors are booming.

“This is a pretty significant reset when the rest of the industry isn’t seeing it,” said UBS analyst Nikos Theodosopoulos, suggesting that Cisco might need to change its processes “given the breadth of what the company is doing”.

Even in areas where Cisco is gaining, such as wireless, competitors are gaining faster, analysts complained. While Cisco emphasises video and collaboration tools, the core networking business is facing established rivals such as Juniper Networks as well as new entrant Hewlett-Packard.

Executives defended the overall strategy on the call and in later interviews, saying that they continued to gain share in major pieces of the market for networking gear, where Cisco has traditionally dominated.

“We have the broadest portfolio,” Cisco chief financial officer Frank Calderoni told the Financial Times. “Being a broad player in the market, there are going to be some segments where smaller competitors may be making some advances against us.”

Mr Chambers said on the call that he saw no reason to slow Cisco’s aggressive acquisition strategy or change its pursuit of new areas.

Switch and router sales were up 25 and 13 per cent in the quarter, respectively.

All told, Cisco turned in net income of $1.9bn, or 34 cents a share, on revenue of $10.8bn.

Non-GAAP earnings of 42 cents a share beat the Wall Street average of 40 cents.

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