Cisco: 'We're Talking Ourselves Into This Slowdown'

Is the recession real? Or is it all just driven by media hype? CEO John Chambers gives his view.

Quarter after quarter, year after year, Cisco Systems has been a bellwether for the IT industry. So when the networking giant sees trouble ahead, people take notice.

During Cisco's Wednesday earnings call for its second fiscal quarter, CEO John Chambers announced solid results. However, the news was tempered by his warning that the company is seeing signs of a slowdown in its business.

For the quarter ending Jan. 26, Cisco said net income totaled $2.1 billion ($0.33 per share), a year-over-year gain of 7.2 percent compared to the same quarter last year. The networking vendor's net sales also rose to $9.8 billion, an increase of 16.5 percent over the second quarter of 2007.

While those numbers looked rosy, Chambers grew cautious when providing guidance for the next quarter, thanks to what he described as a slowdown in sales during January.

As a result, the company lowered its sales growth expectations to only 10 percent for the coming quarter. Chambers said Cisco is sticking with its long-term growth target of 12 to 17 percent, however.

The report sent Cisco's shares tumbling in early-morning trading on Thursday.

What's to blame for the showdown? To Chambers, it's largely self-fulfilling: the fault of businesses believing hype about a slowdown. Consequently, he said customers are taking a cautious approach as reports of a souring economy continue to dominate the media.

That pessimism is causing lengthier sales cycles for Cisco, he said, with approvals taking longer than previously. It's fundamentally a matter of confidence among businesses as to where the economy is going, he added.

"When you really talk about our numbers, part of what we are building into this is we do think there is a very cautious attitude in the boardroom and that's different than six months ago," Chambers said. "We do think that people tend to hesitate and maybe put people through more hurdles to get approval, more signatures, and a little bit tighter return expectations until they figure out, 'How does this look?'"

Overall, however, Chambers said he expects the slowdown will be temporary and will not have long-term implications for Cisco's business.

Additionally, he noted that Cisco historically tends to thrive during market slowdowns and he doesn't expect the present to prove an exception.

Chambers added that Cisco's core switching business experienced a solid second quarter, but he did admit that the company will probably see it become more challenging as the year progresses.

On the positive side, Chambers said he remains optimistic about Cisco's key service provider segment, which is fueling a good portion of its continuing growth.

Just after the quarter ended, Cisco announced its biggest switching platform evolution in a decade with the Nexus 7000.

Another key part of Cisco's future will be in collaboration and Web 2.0 technologies. The company made a number of aggressive moves in 2007 in the space, including the acquisition of WebEx for $3.2 billion.

"Collaboration enabled by the network Web 2.0 technologies will, in our opinion, transform business models with a speed we have not seen in over a decade," Chambers said. "It is our intent to not only lead, in terms of thought leadership when applying these technologies, but to be the best example of how this can drive productivity and a number of cross-functional opportunities a company can focus on at any point in time."

TAGS: networking,Cisco,economy

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