Cisco has warned that government spending cuts will include network equipment and will report its quarterly results on Wednesday. Investors expect things to be bleak. Already Juniper Networks and Brocade have warned that profits will not be as good as they hoped.
The results caught Wall Street on the hop as the cocaine nose jobs failed to realise that networking companies were so dependent on government contracts. Shares in networking companies have been involved in a big selloff.
This is odd as the analysts had been expecting high-growth because of the advent of multimedia streaming, smartphones and demand from China.
But with the US economy in poor shape and the debt ratings agency Standard & Poor’s downgraded the United States’ long-term credit rating due to Republican point scoring there are worries that things will get worse for networking companies.
Governments are likely to trim back projects further making networking outfits all the poorer.
Cisco’s John Chambers warned investors a year ago of “unusual uncertainty” in the economy and he has continued to be cautious about public-sector spending.
Cisco is overhauling itself and cutting jobs as it tries to revive growth, but if Juniper and Brocade are suffering then the problem must be more about broader economic issues plague the business rather than something that is Cisco specific.
Sterne Agee analyst Shaw Wu told Reuters that because of this environment, the service providers and corporations want to keep spending on a leash. A recent deal by US legislators to reduce the federal budget means the US government is also likely to buy less networking equipment. Cisco depends on government spending for about a fifth of its sales.
On the plus side, Wu was optimistic about the business’s long-term prospects as fast-growing adoption of smartphones and other mobile gadgets spurs demand for bigger and better networks and data centres. We guess it is just going to be a rough couple of years.