Cisco results pulled back by emerging markets

In Q1 FY ‘14 Cisco delivered record non-GAAP earnings per share of $0.53 per share and revenue growth of 2% year-over-year. “This level of revenue growth in Q1, while not inconsistent with some of our large peers was below our expectations for the quarter,” John Chambers - Chairman and CEO told analysts.

“Over the last few quarters, I’ve shared what I’ve been seeing, a microenvironment that is inconsistent and very hard to read, with business leaders confidence slowing purchase decisions.”

Cisco has felt the effect of lower confidence and loinger buying cycles in the emerging areas. “From a macroeconomic perspective, in the last two quarters, our order growth rate in emerging countries, which is over 20% of our product business, has gone from a positive 13% in total in Q3 to a negative 12% in Q1 of this year.”

In particular, Russia, where Cisco has been investing heavily, was down 30%. “As we always had, we will continue to focus on emerging markets, investing through the challenges and expect to see return to growth in few quarters with all the appropriate caveats. Every one of our top 10 emerging countries missed their forecast and was off by a fair amount. So it wasn't just that it was down, the last couple of weeks, they kept dropping and dropping.”

The Europe, Middle East, Africa and Russia region declined 4%, due primarily to the effect of the emerging markets' public sector and SP. Central Europe continued to show positive growth, he says. Southern Europe continues to be challenging. Europe, while there are positive trends remain challenging as seen in the recent ECB interest rate reduction announcement

Cisco had relative strength in data centre, wireless, security and the switching business, he says. But there was a challenge in the service provider sector.

The switching business performed well with growth of 3%. Switching gross margins, including new products, continue to be very stable, it reports.Data centre business grew 44%, as customers continue to adopt unified computing systems (UCS).

“We continue to see success with solutions such as SAP HANA that incorporates our UCS servers. Converged solutions from NetApp, FlexPod and EMC, VMware, Vblock are now each running at over a $1 billion run rate for their total business. Overall, security revenues grew 8%, with particular strength in network security, up 12%. We closed the Sourcefire acquisition on October 7th and are already seeing the benefits of a focus and the assets we fully acquired.”

The top five emerging countries all had negative performance in the quarter: “It the consistency of that number is what concerned me. And we usually unfortunately see things couple of quarters ahead of our peers. This time we were little bit surprised. We saw the softening in Q4 and we were very upfront with it to every one about what happened in our top five emerging countries in Q4 where we said they went from 13% growth the quarter before to flat in Q4. The other 15 countries continue to grow in low teens. This time all of them came down and so out of our top 10, it was pretty brutal on that.”