Networking firm Cisco has announced that profits for the last quarter failed to meet expectations.
Network infrastructure firm Cisco last night announced that it missed analysts’ revenue and earnings forecasts for the quarter to January 27. Revenues were 55% higher than the same quarter last year at $6.75 billion, but this was well below forecasts of $7.13 billion. Net income was 18 cents per share against estimates of 19 cents and margins fell from 63.5% to 61.8%. This is the first time for 13 quarters that Cisco has failed to exceed analysts’ expectations. The company’s share price fell by over 10% on the news.
The news that sales growth is slowing should come as little surprise – the economic slowdown in the US means that many companies are slowing their networking spending. Internet service providers, in particular, no longer have the cash to spend on Cisco’s latest kit. In addition, the company admits it has been too slow at cutting production and as a result inventories have grown too large, hitting margins.
However, this hardly makes the company doomed. Cisco is still extremely profitable and has an enormous market share – around 75% in high-end terabit routers. The latest results are nowhere near as bad as those from its biggest competitors Nortel and Lucent. And whilst some analysts make noises about the company falling behind technologically, Cisco has a tradition of finding the best startup companies, buying them for their technology and integrating them with its core business. Its recent acquisition of Cerent, for instance, puts it at the forefront of the current major trend in networking: integrating the transport and the IP layer to build intelligent optical networks.
The main concern about Cisco is that its success in making the right acquisitions has been partly due to its high share price, which made purchases extremely cheap. Clearly, a major fall in share price risks ending this comparative advantage. But it’s easy to overstate this problem. Cisco’s shares might be falling – but its rivals are doing even worse. Nobody’s going to steal Cisco’s crown just yet.
