Cisco is a remarkably strong tech company, but yesterday’s quarterly results were brutal.
The long-running network hardware company has a 27 percent debt to equity ratio, an operating margin of 29 percent, and $48 million in cash.
Yet its revenue shrank by 2 percent against last year, and shares plummeted 12% yesterday. This drop in valuation is attributed to the company’s admission that its overseas business and service provider businesses are under major stress.
Today, shares are trading within 24 percent of their 52-week low.
Cisco’s orders for hardware in the developing world dropped by 12 percent in the quarter. Even with its brand new Center for Innovation in Rio de Janeiro, Cisco’s business in Brazil dropped by 25 percent in the quarter.
The majority of the loss took place in the Asia Pacific region, which suffered a 10 percent overall loss in business. In Russia, for example, its business dropped by 30 percent. India and China shrunk by 18 percent each. Across the globe, Cisco’s Service Provider segment shrunk by 13 percent in the quarter.
What’s worse is that Cisco does “not anticipate material improvement in our order growth,” in either the developed or developing world.
Herein lies one critical problem.
Despite the fact that recurring services constitute one quarter of Cisco’s business, 70 percent of its product revenue is dependent upon new orders in each quarter. As technologies change, Cisco shares can actually become even more volatile from quarter to quarter.
At the present rate, Cisco’s revenue will drop by approximately 10 percent every year.
Slumping
There are two big elements in last quarter’s performance: the economic climate and the political climate.
The economic climate is easy to explain. Research firm IDC Worldwide Black Book showed that global IT spending in 2013 has suffered through its slowest growth since the financial crisis of 2008. In times of financial uncertainty, the investment in new technology, like Cisco’s “new” application-centric infrastructure, is appreciably choked.
The political climate is a bit sketchier.
In the earnings call, Cisco Chairman and CEO John Chambers said business in China continued to decline as the company attempts to “work through the challenging political environment” there.
If you haven’t been keeping track, IBM, Microsoft, and Hewlett-Packard all reported declining sales in China this quarter.
In Cisco’s earnings call yesterday, Chambers said the revelations about the NSA’s international surveillance activities have been harmful to business in China.
Indeed, more than two years before the Edward Snowden leaks, the United States made strong allegations against Chinese IT companies ZTE and Huawei for their own espionage.
In 2012, the House of Representatives Intelligence Committee released a report that said neither company would provide sufficient information to allay fears of spying.
After Snowden revealed much of the NSA’s spying activity, the rhetoric against China increased. Former CIA head Michael Hayden openly accused the Chinese hardware companies of spying on customers for the Communist Party.
The mutual distrust affectively shuts Cisco out of China the way the US Government shut out ZTE and Huawei, and has much broader consequences.
The Indian and Australian governments, for example, have both blocked Huawei from participating in major infrastructure projects for fear that they worked too closely with the Chinese Government.
As the NSA’s spying activity became public knowledge, Cisco was put in a similar position. Other countries might begin to see Cisco as an extension of the United States surveillance apparatus rather than a forward-thinking IT company.
And unfortunately for Cisco, nobody wants to invite a spy into their house…
