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Cisco Sales Forecast Falls Short on Slowing Global Economy

Ian King and Nico Grant

(Bloomberg) -- Cisco Systems Inc. gave a quarterly sales forecast that fell far short of projections, signaling that companies are postponing hardware purchases amid global political and economic uncertainty, including the China-U.S. trade standoff. Shares fell more than 4% in extended trading.

Revenue in the fiscal second quarter will decline 3% to 5% from the same period a year earlier, the San Jose, California-based company said Wednesday in a statement. That indicates sales of about $11.9 billion, compared with an average of analysts’ estimates of $12.8 billion, according to data compiled by Bloomberg. Adjusted profit will be 75 cents to 77 cents a share, also missing analysts’ predictions.

Chief Executive Officer Chuck Robbins is transitioning Cisco into more of a networking software and services company. While that push is delivering results -- helped by a slew of acquisitions -- the company still gets the majority of sales from machines that are the backbone of the internet and corporate networks.

“Just go around the world and you see what’s happening in Hong Kong, you look at China, what’s happening in D.C., you’ve got Brexit, uncertainty in Latin America,” Robbins said during a conference call with analysts. “Business confidence suffers when there’s lack of clarity and there’s been a lack of clarity for so long that it’s finally come into play.”

If sales drop as projected, it would be Cisco’s first quarterly year-over-year revenue decline in two years.

Cisco shares declined to a low of $45.12 in extended trading after earlier closing at $48.46 in New York. The stock has gained 12% this year.

Fiscal first-quarter net income fell to $2.93 billion, or 68 cents a share, from $3.55 billion, or 77 cents, a year earlier. Revenue gained less than 1% to $13.2 billion. Excluding certain items, Cisco posted profit of 84 cents a share.

Cisco has said that the biggest drag on its earnings are cable companies that are trying to extend the life of their existing gear rather than buying new equipment. Adding to that slowdown, a big chunk of spending by phone-service providers is on the early deployment of 5G, or fifth generation, cellular networks. That’s mainly for the base station radio towers that Cisco doesn’t sell. Its gear will be needed later when traffic picks up in data centers.

Cisco’s hardware business generated sales of $7.54 billion in the period ended Oct. 26, a drop of 1% from a year earlier. Applications, its software unit, gained 6% to $1.5 billion and security revenue jumped 22% to $815 million.

Cisco is the biggest maker of routers, switches and other gear used to connect computers. About 60% of revenue comes from the Americas region. The company gets a tiny percentage of sales from China, where it has been largely locked out of the market. Chief Financial Officer Kelly Kramer said Cisco’s business in China decreased 31% in the quarter, accelerating a downward trend.

(Updates with comments from CEO in the fourth paragraph)

To contact the reporters on this story: Ian King in San Francisco at ianking@bloomberg.net;Nico Grant in San Francisco at ngrant20@bloomberg.net

To contact the editors responsible for this story: Jillian Ward at jward56@bloomberg.net, Andrew Pollack

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