Think the trade war between the United States and China won't have a big effect on the communications economy? Think again. Cisco shares plunged Thursday morning after the company reported weak revenue guidance as well as a large drop in Asian orders and weak growth in other parts of the world. The stock was down $3.35 (6.5%) to 47.26 in early trading.
Cisco, which is often watched as an indicator for the global economy, reported solid numbers for fourth fiscal quarter earnings for the period ending July 31, but company officials said that growth was likely to slow in the next quarter to the 0-2% range. Cisco reported revenue of $13.4 billion in the quarter, an increase of 6% year-over-year, and non-GAAP net income of $3.6 billion, up 9%. Non-GAAP EPS was $0.83, up 19%.
Big cracks on the economic growth story emerged with the company's product order numbers, which are a better indicator of future demand. This included weak order growth in China, emerging markets, and the U.K.—as well as abysmal numbers for the service provider segment.
Cisco executives said that its Chinese product orders fell 25% on an annualized basis in the quarter, though it says that revenue from China is less than 3% of overall sales and will be less of an issue going forward. Orders for the service-provider segment dropped 21%.
Geographically, it's clear that global growth is taking a hit—particularly in the Asian markets, and the catch-all for emerging markets known as "BRIC" (Brazil, Russian, India, China). Cisco reported that product orders for emerging markets were down 8% with the BRICS plus Mexico down 20%. In other geographies, Cisco said that the Americas came in at 1%, EMEA (Europe, Middle East, Asia) was up 4%, but APJC (Asia Pacific, Japan, China) was down 8%.
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In other words, the numbers for the next quarter won't be nearly as good.
Cisco officials and Wall Street analysts tried to put the best spin on the report—Cisco CEO Chuck Robbins pointing to the solid results and earnings as well as progress in many hot innovation areas during Wednesday's conference call.
"We are innovating across every facet of our portfolio integrating AI, automation, security and assurance into our Nexus switching platforms and our 400 gig offerings," Robbins said. "This quarter, we delivered data center network insights providing critical analytics and proactive network management capabilities through automation to increase our customers' ability to troubleshoot and remediate their environment."
There were some bright spots. Cisco reported 14% growth in cybersecurity and 11% growth in applications.
But it's hard not to look at the Cisco quarter and see that the global tech economy won't have issues going forward, with growing geopolitical struggles between the U.S. and China, as well as other possible hits, such as a slowing growth worldwide, a looming recession in Europe, and Brexit struggles in the U.K.
Cisco's report falls into a pattern of more disappointing reports reflecting slower growth in the global tech economy, particularly in cloud and communications.
For example, a negative announcement from NetApp was one of the big red flags of the quarter. NetApp reduced its revenue forecast by 12% to $1.22-1.23 billion. The company cited macroeconomic factors. NetApp CEO George Kurian pointed to a degrading macroeconomic environment.
Public numbers for cloud capital spending, meanwhile, have been slowing as well. The big four cloud companies—Microsoft, Facebook, Amazon, and Google—have all decreased capex in the last year. Recently, Facebook's capex came in about 20% below analyst estimates, and Google was 10% below consensus.
The telecommunications sector also has reported grim capital spending numbers. Verizon recently reported second quarter capital expenditures of $3.70 billion, below most analysts estimates of around $4.2 billion. That's down nearly 15% sequentially.
So investors and industry watchers might want to set aside their most optimistic outlooks—and start planning for darker clouds. Cisco's weak product growth numbers are sending an obvious warning signal about the communications economy going forward.
R. Scott Raynovich is the founder and chief analyst of Futuriom. For two decades, he has been covering a wide range of technology as an editor, analyst, and publisher. Most recently, he was VP of research at SDxCentral.com, which acquired his previous technology website, Rayno Report, in 2015. Prior to that, he was the editor in chief of Light Reading, where he worked for nine years. Raynovich has also served as investment editor at Red Herring, where he started the New York bureau and helped build the original Redherring.com website. He has won several industry awards, including an Editor & Publisher award for Best Business Blog, and his analysis has been featured by prominent media outlets including NPR, CNBC, The Wall Street Journal and the San Jose Mercury News. He can be reached at [email protected]; follow him @rayno.
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