Cisco warns emerging market weakness is no blip

John Chambers cuts longer-term targets

Weak demand in emerging markets was more than a short-term “blip” and likely to have a broad impact on US companies for some time, John Chambers, Cisco Systems’ chief executive, warned as he cut financial forecasts again on Thursday.

“We are the canary in the coal mine,” Mr Chambers told an investor meeting in New York, noting that because of the breadth of its business, the networking equipment company often detects macroeconomic trends ahead of its peers.

Last month Cisco shocked investors when it warned that its revenues could fall as much as 10 per cent in the current financial quarter, sparking fears that it is losing ground amid big technology transitions in some of its markets.

At that time, Cisco revealed that new orders fell 12 per cent in the developing world, with Brazil down 25 per cent and Russia off 30 per cent, a sharp reversal from the 8 per cent jump experienced in the preceding three months.

Highlighting its concerns, Cisco went further on Thursday, cutting its longer-term earnings and revenue growth targets because of the slump in orders from some emerging markets coupled with cautious spending in developed markets and slow growth in its core network equipment business.

Frank Calderone, chief financial officer, said the company now expected revenue to grow by between 3 per cent and 6 per cent over the next three to five years, down from a previous estimate of 5 to 7 per cent growth. It expected earnings per share to grow by 5 to 7 per cent, down from its previous target of 7 to 9 per cent.

While the Cisco executives described emerging markets as “extremely challenged” at the moment, Mr Chambers said he expected the company’s sales to grow by 6 to 10 per cent when they finally recovered.

In the US, he said he was cautiously optimistic despite very slow growth in the core network equipment operations offset in part by strong growth in its enterprise business. “The US is the only engine that is going to pull us out (of the downturn),” he said.

Mr Chambers also acknowledged that the company’s business in China had been hit by political considerations, particularly the revelations this year about the NSA’s data collection and tracking activities.

The Cisco chief executive declined to speculate on whether China’s actions might be in retaliation to the effective ban in the US on network equipment supplied by Huawei because of US security concerns.

He expressed confidence that although “it is not something that is going to change quickly”, it would eventually be resolved. “We are in China for the long term,” he said.

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