The text: "DAVOS-Cisco says quarter more challenging than expected"
By Lucas van Grinsven, European technology correspondent
DAVOS, Switzerland, Jan 28 (Reuters) - U.S. networking company Cisco (NasdaqNM:CSCO - news) said
on Sunday the current fiscal quarter looked more challenging than a few weeks ago, but the longer term
outlook had improved.
Cisco was being hit by reduced investments from its main customers in the telecom sector after it had
initially felt immune to the slowdown of the U.S. economy, Cisco's Chief Executive John Chambers said in a
fringe meeting at the World Economic Forum in the Swiss Alps.
``The business in January was a little bit slow. We said (in an investor meeting on January 10) that the
quarter surprised us a bit and that it was challenging; well, it's every bit as challenging as we thought it
would be,'' Chambers said.
``It's more challenging than we anticipated,'' he added, saying also that ``We know our system is cold.''
Investors should brace for a hazy first half year.
``We are going to get a pretty wide range of estimates, wider than I said (on January 10). For the next two
quarters you're going to look at a pretty wide range of growth,'' he said.
Cisco's window of guidance on quarterly profits per share is usually around three dollar cents.
Chambers, who was speaking with a group of journalists, said the uncertainty was mainly due to its
American telecom clients.
``It really comes down to capital spending. It's a U.S. phenomenon, and almost entirely service providers,''
he said.
``The more focus on enterprise customers, there will be a lower impact, but still some,'' Chambers said.
Enterprises, especially ``old'' economy companies, continue to invest in Internet applications in an attempt to
increase productivity, but many telecom companies are struggling with a hostile environment of slower
growth and investors' concerns about the telecom sector financial health.
ALL OVER IN TWO QUARTERS
Chambers said he was confident the downturn could be over in six months' time.
``I believe we're probably talking a two quarter phenomenon, although it could last longer. I'm talking the
first half of this year for most companies in the U.S.,'' he said.
European customers showed resilience against the U.S. slowdown, despite some weakness in the telecom
market, most notably from new British operators of which many have recently cut their expansion plans.
The European enterprise market is growing faster this year than last year, said Bill Nuti, Cisco's European
manager.
``There are certainly lower investments from new telecom operators, but the old PTTs are seeing this as an
opportunity to gain market share and are actually investing more,'' he said.
Chambers was upbeat that American recovery would be driven by tax cuts from the new administration of
U.S. President Bush and more rate cuts.
``President Bush will get the income tax reduction through. The only question is what size. Whereas a month
and a half ago most people thought that we wouldn't need one,'' Chambers said, who added he had already
met with the new president.
CRITICAL ON THE FED
Chambers also said that the Federal Reserve had missed an opportunity to cut rates in December.
``My customers started to say in December: John, my business has suddenly hit a wall. Like a light switch
went off.''
The Federal Reserve did not realise that these companies immediately cut back their investment plans,
Chambers said.
``By late December and early January my customers had changed their spending plans for the first quarter
and the year. That's what the Fed did not realise in December. Businesses are taking decisions on rapid
information flow, while the Fed waits for information that comes in after about three months,'' he said.
The result was that the networking industry would see ``a lot of lay-offs in this quarter'' and that staff growth
at Cisco will ``slow dramatically''.
``We'll only start to grow staff after we are seeing the U.S. economy come back out,'' Chamber said.
LONG TERM POSITIVE
But he remained upbeat about the long-term prospects of his
company.
"Our expectation for the long run has in fact become
better," Chambers said. "Our long-term 30-50 percent sales growth over the long term is probably a bit
conservative right now," he added.
Other network providers suffered more, because they lacked the market leader advantage.
``My toughest competitor two years ago, Lucent, very broad based, many times our size, doesn't make the top
ten anymore. It shows how quickly you fall from grace, and once a high-tech company trips, it is very
difficult to come back,'' he said.
The Internet fundamentals remained unchanged and would drive Cisco's business. Chambers said
productivity growth as a result of Internet infrastructure investments outpaced the combined investments of
telephony, transportation and electricity by ``probably two or three. But definitely by one''. |
