European crisis casts shadow on Cisco earnings

Cisco battled the global economic storm in its third quarter, with depressed spending in Europe hitting product sales in the region, and customer worries over the future of the global economy causing Cisco to anticipate more tough times ahead
Written by Jack Clark, Contributor

The European economic crisis crimped Cisco's earnings in the third quarter of 2012, with the networking company taking $2.2bn in income off the back of $11.6bn in revenue, and has cast a shadow over future revenue.

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Cisco battled the global economic storm in its third quarter, with depressed spending in Europe hitting product sales in the region. Image credit: Charles McLellan

Cisco said that "ongoing economic challenges" it faces stem from weakness in Europe — where product orders for Cisco kit were flat year-on-year — coupled with the dismal state of the world's economy.

"We have a solid game plan, and in our view, are successfully executing against the plan even in the face of ongoing economic challenges and cautious IT spending, especially in the enterprise accounts," John Chambers, Cisco's chief executive, said on a call discussing the earnings on Wednesday. "There are areas in the macroeconomic environment that we cannot control, and they may impact Cisco's near-term business."

Even China, typically a strong region for the company, was down eight percent year-on-year, though this was due to some major contracts closing in the previous quarter, Chambers said.

Cisco has been worrying about Europe for months, with it warning in its first-quarter earnings that it anticipated trouble in the region.

Meeting expectations 

Nevertheless, the San Jose-based networking company reported steady earnings on Wednesday, meeting the expectations of Wall Street analysts.

The results for the third quarter of 2012 saw revenues climb 6.6 percent on the previous year's $10.9bn (£6.76bn), with income up 19.8 percent on the previous $1.8bn. However, income and revenue were close to flat on the previous quarter's $2.2bn and $11.5bn, respectively.

Product revenues were up five percent to $9.1bn, with switching up five percent year-over-year to $3.6bn, next-generation networks flat at $2.1bn, and datacentre revenue up 67 percent year-over-year to $291m, though down slightly on the previous quarter's $333m. Services revenue was up 13 percent to $2.5bn.

The company shored up its engineering headcount in the quarter, hiring 1,353 across services and technology, bringing total headcount to 65,223.

"We needed more engineers," Chambers told AllThingsDigital in a phone interview. "The additions were around either building products or converting services. In terms of our organisation structure, we re-did Cisco."

In terms of our organisation structure, we re-did Cisco.
– John Chambers, Cisco

During the quarter, Cisco acquired UK-based pay-TV technology company NDS for £3bn. "We continue to look forward to the close of our NDS acquisition announced in March," Chambers said. "This transaction, which remains subject to regulatory review, [should] significantly increase the speed with which we can help our service providers and, in a broader set of media players, deploy and monetise the next-generation [of] video experiences."

Cisco expects revenues to grow between two to five percent on a year-over-year basis in net income, its chief financial officer Frank Calderoni said on the call.

The results come a year after Chambers announced a major reorganisation of his company, which has seen it retrench around core product lines and drop some of its fringe businesses, such as the Flip video camera.

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