Tariffs, China sales weigh on Cisco outlook, shares slide

Tariffs, China sales weigh on Cisco outlook, shares slide

sales in China fell 25 per cent and the country's state-owned enterprises were no longer taking bids from Cisco

Credit: Dreamstime

Cisco has said that impending US tariffs and Chinese customers shunning the networking company's gear were weighing on its business, and it forecast sales and profit below Wall Street targets.

Cisco executives said sales in China fell 25 per cent and that the country's state-owned enterprises were no longer taking bids from Cisco.

"We're not being allowed to even participate anymore," Cisco chief executive Chuck Robbins told investors on a conference call.

Chief financial officer Kelly Kramer said in an interview that Chinese companies were dropping Cisco gear and instead buying hardware from domestic Chinese companies.

"There's a certain sense of nationalism," Kramer said.

Cisco estimated first-quarter revenue growth of zero to two per cent. This implies a range of US$13.07 billion to US$13.33 billion, while analysts expect US$13.40 billion, according to IBES data from Refinitiv.

It estimated adjusted earnings of 80 cents to 82 cents per share in the first quarter of 2020, below analysts' forecast of 83 cents.

Shares of Cisco, a Dow component, fell 3.4 per cent in the runup to results amid broader declines in the market, and dropped eight per cent to US$46.53 in after-hours trading.

While sales to China fell sharply, they comprised less than 3% of overall sales in Cisco's fiscal fourth quarter. Slower orders from large businesses, especially in the United Kingdom, also contributed to the below-expectations forecast.

Cisco said US tariffs on Chinese-made goods would soon hit its products, dragging down margins in its fiscal first quarter. US President Donald Trump said this week he would delay a 10 per cent tariff on some Chinese-made goods until December. But Kramer said most of Cisco's goods were not part of the temporary reprieve and face tariffs next month.

"Nothing got excluded so far," Kramer said.

That would weigh on the company's margins in its fiscal first quarter, she added. Cisco forecast adjusted gross margins of 63 per cent to 64 per cent, virtually unchanged from the 62.9 per cent in the just-reported quarter.

Since taking the helm in July 2015, CEO Robbins has emphasised growth areas such as the cloud, Internet of Things and cyber security through acquisitions.

Sales in Cisco's cyber security business, which offers firewall protection and breach detection systems, rose 14 per cent to US$714 million in the fourth quarter, but missed estimates of US$737.1 million.

Net income fell to US$2.21 billion, or 51 cents per share, in the fourth quarter ended July 27. Excluding items, it earned 83 cents, above estimates of 82 cents.

Total revenue rose 4.5 per cent to US$13.43 billion and beat the average analyst estimate of US$13.39 billion.

(Reporting by Sayanti Chakraborty in Bengaluru and and Stephen Nellis in San Francisco; Editing by Arun Koyyur and Richard Chang)

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