Cisco takes a beating on Q1 miss

Cisco Systems Inc. fell more than 12% as its first-quarter revenue came up short of expectations and the company cut its second-quarter guidance.

The networking equipment maker’s shares declined US$2.63, or 11%, to US$21.37 on the Nasdaq Thursday after releasing results Wednesday night that were negatively impacted by weak order flow from emerging markets. Orders from BRIC countries dipped 21% year over year.

“The weakness in Asia Pacific, Japan & China and emerging market orders could take several quarters to improve,” said Brian Modoff, a San Francisco-based analyst with Deutsche Bank.

He downgraded the stock to hold from buy and cut his target price to US$25 from US$28.

Mr. Modoff said that the spread between Cisco’s US$11billion Q2 guidance versus estimates calling for US$12.6billion suggests management likely floored the revenue contribution from emerging markets. He also believes the company took a haircut on revenues from its data-centre switching, enterprise wireless and service provider routing businesses due to major technology transitions.

“Cisco’s challenges in our view are cyclical and product transition oriented – versus the bear case thesis that argues for white box switches and software-defined networking use cases causing meaningful average sales price and gross margin erosion in Cisco’s switching business over the next few years,” he said.

J.P. Morgan analyst Rod Hall said Cisco dropped “a doozy of a negative guide on investors.” As opposed to the 4.3% year-over-year growth he had forecasted, Cisco said it expects revenues will decline by 8%-10% due to what appears to have been a rapid deterioration in its emerging markets service provider (SP) business as macro conditions in those countries degrade.