Cisco beats estimates but forecast dampens enthusiasm

Shares of Cisco Systems dropped in early morning trading after forecasting that its second fiscal quarter revenues would be flat to down four percent.

The forecast overshadowed what was otherwise a solid first quarter earnings report from the bellwether company.

For the quarter ending Sept. 30, Cisco reported revenues of $4.8 billion, up nine percent year over year and flat sequentially.

Including one-time items, net income for the quarter was $618 million or eight cents per share, down from 10 cents per share the previous quarter.

On a pro forma basis, the company posted earnings of $1 billion, or 14 cents per share, beating the First Call consensus analyst estimate by a penny.

Broken down by geographies, the U.S. accounted for 50% of Cisco’s revenue, followed by Europe, Middle East and Africa (EMEA) at 28%, Americas international at 14%, Japan at 7% and the rest of Asia-Pacific at 11%.

But it is the company’s guidance that has gotten the most attention. Not surprisingly much of the company’s weakness is expected to come from its service provider segment. According to Cisco CEO John Chambers, the company is preparing for further cuts in capital expenditures among these customers.

“[Service provider] CEOs are increasingly cautions about capex spending and hiring until they see their own revenues and profits improve. Their visibility is in a number of cases becoming more limited. We are realistic that this market will probably get tougher in terms of total capex over the next several quarters before it gets better,” said Chambers.

If further capex cuts are instituted, they are likely to be more targeted than earlier reductions, said Charles Giancarlo, head of Cisco’s Service Provider Business council.

For most carriers, previous capital expenditure reductions tended to affect technologies across the board. Now, however, budgets are tight enough that carriers will have to start making decisions that commit them to long-term plans.

“They’re saying, ‘we cannot continue to invest both in the old and the new. We need to make our decisions as to what are the right architecture going forward and cautiously invest in them,’” Giancarlo said.

Among the areas that are likely to be negatively impacted in this type of capex reduction are central office switching, dense wave division multiplexing and backbone technologies, he said.

Cisco stock was down more than 3% to $12.54 in mid-morning trading.