Why Cisco can't call a bottom: Customers are still reeling

Cisco's third quarter earnings were solid courtesy of savvy expense management, but CEO John Chambers refrained from calling a bottom. A deep dive into Cisco's customer trends reveal why: Most of the company's growth markets---India, emerging markets and advanced technologies--are still reeling. 

Cisco's third quarter earnings of 30 cents a share excluding items topped Wall Street estimates by 5 cents a share. Revenue of $8.2 billion was down 16.6 percent from a year ago. The takeaway: Cisco has been savvy about managing its costs. Chambers noted that the company is close to exceeding its "stress goal" of lowering its annual expenses by $1.5 billion.

But unlike other tech CEOs, Chambers declined to call a bottom. On a conference call, Chambers said the business was leveling out but sales in the fourth quarter will still be down 17 percent to 20 percent from a year ago. He said:

Let me be very specific in saying that while the business appears to be leveling out, again at a lower rate than anyone would like, it needs to level out before an up turn could potentially occur. Again, no one knows how long this leveling out will last or whether it will result in an up turn several quarters from now or if there still remains a very real possibility it could still go down. 

And.

It continues to be one of the more difficult times in my career in terms of my comfort level with the forecast.

Why isn't Chambers joining the bottom-calling crowd? His businesses are still declining big time. To wit:

• Cisco's unified communications revenue fell 7 percent in the third quarter compared to a year ago;
• Networked home revenue fell 14 percent;
• Order growth in India fell more than 40 percent;
• The enterprise and service provider markets remain weak.
• On the bright side, Cisco's telepresence business saw revenue growth topping 130 percent in the third quarter with 45 new customers and 400 new system orders. 

JP Morgan analyst Ehud A. Gelblum in a research report cooked up a handy chart that illustrates Cisco's customer dynamics. I highlighted key areas:

Gelblum writes:

While Cisco continues to do an excellent job managing costs - similar to Juniper and F5 - cost cutting only goes so far, and we continue to believe the company’s exposure to the Ethernet switch market could remain an albatross around the growth story, delaying any recovery.

Nevertheless, Cisco's outlook for the fourth quarter was better than expected. JMP Securities analyst Samuel Wilson said that Cisco quarter was like putting air into a flat tire. When a rebound does eventually occur Cisco will be rolling.