Publish date:

Cisco Wakes Up to Tough Times

Shares fall after CEO John Chambers says he now sees timid customers.

Cisco

(CSCO) - Get Cisco Systems, Inc. Report

is always the last to know about slowing growth in tech.

After reporting in-line second-quarter numbers late Wednesday, CEO John Chambers cited a "challenging" January, with the weakness coming from the U.S. -- and now Europe.

Chambers

cut fiscal third-quarter guidance, predicting that sales would increase by only 10% over year-ago levels -- a target well below the 15% expected for the quarter ending in April.

Shares of Cisco were recently off 69 cents, or 3%, to $22.39.

It took a nasty downturn in orders last month before Cisco realized that all this talk about a credit crunch and a looming recession was dramatically shaping its customer's spending plans.

And while the tightening budgets in tech blindsided Cisco, investors were already bracing for a slump. Cisco's shares have dropped by a third in the past three months.

Still, optimists held out hope that Cisco's broad exposure across multiple product lines like video and data storage, as well as business in fast-growing developing markets around the world, would help offset any areas of specific sluggishness.

TheStreet Recommends

That scenario didn't hold up well, however.

"Cisco no longer appears to be the safe haven to weather the economic storm that we had thought it was," wrote JPMorgan analyst Ehud Gelblum, who cut Cisco to neutral from buy Thursday.

Cisco watchers note that Chambers has a bad track record for predicting negative trends. When all signs pointed to a collapse in the Internet-building boom at the end of 2000, Chambers was

still calling for 50% sales growth.

This time around, Chambers has shown a similar resistance to downward indicators. As a rule, Chambers tries to separate sentiment from action. Being cautious is of course good, but letting caution determine order cuts is presumably something Chambers would like his customers to avoid.

As recently as November, when the U.S. banking sector was getting crushed by bad loans, Chambers was

actively tuning out all the negative chatter he was hearing on the business channel. The gloomy talk had forced him to take his morning exercise routine outside, away from the TV, he said on the November earnings call.

In November, Chambers said sluggish tech spending in the U.S. was not spreading to other markets, adding that he wasn't seeing any "issues of concern" among customers. And in August, Chambers said "This is the strongest global economy I've been a part of."

Now, with Chambers saying the challenges of January "may continue over the next several months," some observers say there's a chance that Cisco may be acknowledging what many already see.

"Management decided to curb guidance after just one month of slow order growth in January due to weakness in the U.S. and Europe," JPMorgan's Gelblum writes, "indicating this slowdown could be just the tip of the iceberg."