Cisco Forecast Sinks Hardware Makers

Investors fret about future tech orders.

Author:: Daniel Del'Re
Publish date:: Nov 8, 2007 1:36 PM EST

SAN FRANCISCO -- Several tech hardware makers saw their stocks crumble on Thursday, a day after network gear maker

Cisco Systems

(CSCO) - Get Report

warned of slowing sales to U.S. businesses.

Shares of data storage maker

EMC

(EMC)

were recently down $2.13, 9.5%, to $20.11, while shares of it smaller rival

Network Appliance

(NTAP) - Get Report

fell nearly $2.56, nearly 9%, to $26.58.

IBM

(IBM) - Get Report

shares were off $5.89, more than 5%, to $105.19.

The turbulence stems from increasing evidence that the credit market turmoil is leading to a decrease in orders of tech goods and services as ailing banks and financial institutions rein in spending.

Also, signs are emerging that sales will remain slack in early 2008 as many companies delay making their IT budgets until the credit market uncertainty lifts and the full extent of the macroeconomic headwinds can be reasonably estimated.

Investors and analysts have been waiting for third-quarter earnings results to shed some light on how a slowing economy might affect purchases of tech products and services in the U.S. Many companies have said they're experiencing strong sales of their goods abroad, and the weak dollar amplifies those gains. But they still derive most of their sales in the U.S., which remains the biggest market for tech goods and services.

Credit market issues have stoked fears about a slowdown in tech purchases from financial services firms, which are heavy buyers of hardware, software and services. Investors' fears began stirring in September when IBM said weak orders from financial institutions contributed to a 13% decrease in hardware sales.

The billion-dollar losses from mortgage related investments reported this week by

Citigroup

and

Morgan Stanley

(MS) - Get Report

raised the possibility that credit markets will remain volatile into 2008 as mortgages adjust to higher interest rates and push more homeowners into foreclosure.

Tech firms announcing earnings this week exacerbated investor unease by noting that the crisis is beginning to affect their business. On Tuesday, the tech services firm

Cognizant

(CTSH) - Get Report

warned that the typical rush of IT spending it sees in the last quarter of the year hasn't materialized because of concerns over

macroeconomic conditions.

Cisco added to the drumbeat of ominous signs by saying on Wednesday that its

sales to U.S. businesses in its most recent quarter continued to grow, but at a slower pace. In a conference call with analysts, Chief Executive John Chambers said that the company experienced "pretty dramatic year-over-year decreases in orders" to financial services institutions.

Cisco shares were recently trading down $2.79, 8.5%, to $29.96.

As a result, analysts are scrambling to assemble a picture of what tech spending will look like in 2008.

A Citigroup survey of chief information officers found that most expect to increase their budgets to remain flat or to increase by 1% to 2% in 2008. But an increasing numbers of CIOs expressed bearish sentiment about the state of the economy and their company's near-term outlook.

Cowen analyst Moshe Katri expects problems in the credit markets to cause banks to defer their tech spending decisions until January, rather than shaping up budgets in December. That could defer tech purchases until March instead of January, leading to a soft first quarter for many firms.

"I think Wall Street needs to moderate its expectations about how the year is going to start considering the deepening crisis in the banking sector," said Katri.