Why Cisco Shares Plunged

Although we don't believe in timing the market or panicking over market movements, we do like to keep an eye on big changes -- just in case they're material to our investing thesis.

What: Shares of networking giant Cisco Systems (Nasdaq: CSCO  ) have plunged by as much as 11% today after the company reported earnings, but its soft guidance spooked investors.

So what: Revenue rose 7% to $11.6 billion, and non-GAAP net income came in at $2.6 billion, or $0.48 per share. The real reason for the drop relates to comments that CEO John Chambers made on the subsequent conference call with analysts, sparking fears of a slowdown in technology spending.

Now what: Cisco's orders in Europe were flat compared to a year ago, while business at large enterprises slipped 1%. Chambers said that there was "significant uncertainty" in the macro environment, adding, "Each of these areas has proven to be as challenging as we anticipated and several, Europe and customer conservatism, have gotten worse." He noted that while Cisco isn't predicting a major downturn, deals are taking longer to close as buyers remain cautious.

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Fool contributor Evan Niu holds no position in any company mentioned. Click here to see his holdings and a short bio. The Motley Fool owns shares of Cisco Systems. The Motley Fool has a disclosure policy. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. Try any of our Foolish newsletter services free for 30 days.

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  • Report this Comment On May 10, 2012, at 3:52 PM, BradReeseCom wrote:

    Hi Evan,

    I find it interesting that Cisco's highly touted Q3'FY12 data center, sp video and collaboration sales all sequentially declined.

    Cisco's Q3'FY12 operating cash flow and service gross margins also sequentially declined. I mean, even after Cisco's $1 billion dollars in cost cutting its Q3'FY12 operating cash flow is ONLY a mere $ 2 million bucks more than its Q3'FY10 operating cash flow.

    Heck, amazingly Cisco's Q3'FY12 switching sales are -$170 million less than its Q3'FY10 switching sales!

    Furthermore, even Cisco's Q3'FY12 routing sales are -$7 million less than its Q3'FY11 routing sales:

    Finally, with regard to Cisco's 2nd consecutive quarterly decline in collaboration sales (which includes TelePresenc), Tavis McCourt - Managing Director of Equity Research for Raymond James states:

    "We believe that the video conferencing equipment industry likely declined in 1Q12 for the first time since 2009, representing a rapid deceleration from the 20-30% y/y growth as recently as 1H11."

    Specifically to Cisco, McCort estimates Cisco's TelePresence products saw a -5% revenue decline, year over year.

    Interestingly in his April 19th research note to your truly, RBC Capital Markets Managing Director - Mark Sue stated Polycom's weakness is partially due to a:

    "Market transition from point products to packaged solutions."

    According to Cisco's Q3'FY12 collaboration sales results (which includes TelePresence), it certainly appears that Cisco's TelePresence products are experiencing the same weakness.


    Brad Reese

  • Report this Comment On May 23, 2012, at 4:56 PM, thidmark wrote:

    ^^^^ We get it ... you hate Cisco.

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