NSA Spying Chills Cisco's Earnings

Networking giant forecasts double-digit revenue decline as emerging market growth slows, but expresses confidence in ACI initiative.

By Sean Michael Kerner | Posted Nov 14, 2013
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Cisco grew its revenues during the first quarter of its fiscal 2014 but does not expect that growth to continue into the second quarter. The networking giant provided gloomy guidance for the second quarter.

Cisco reported its first quarter fiscal 2014 earnings late Wednesday with revenue coming in at $12.1 billion, a 1.8 percent year-over-year gain. The vendor reported $2.0 billion in net income, a 4.6 percent year-over-year decline. Moving forward, Cisco provided second quarter fiscal 2014 guidance for total revenue to decline in the range of 8 to 10 percent on a year-over-year basis.

There are a number of drivers for Cisco's declining fortunes. Near the top of the list is the U.S. government. Cisco CEO John Chambers said during his company's earning call that the last month of Cisco's first quarter was during the U.S. government shutdown.

"The impact on our federal business was approximately $50 million," Chambers said.

Cisco also suffered from the global impact of the Edward Snowden leaks around U.S. government surveillance conducted by the National Security Agency (NSA). Chambers said that the NSA snooping scandal affects Cisco's efforts in China and other emerging markets.

"I think, if you look at it, it is an impact in China. I think we’re all aware of that," Chambers said. "I think its impacting on the total emerging country business, however, is fairly nominal."

Rob Lloyd, president of development and sales at Cisco, added that NSA snooping concerns have increasingly caused Cisco customers to pause and evaluate the issue.

"So it's not having material impact, but it's certainly causing people to stop and then rethink decisions, and that is, I think, reflected in our results," Lloyd said.

The biggest dip in Cisco's results comes from the company's order growth rate in emerging countries, which represent over 20 percent of Cisco's product business. At the end of Q3 2013, the emerging market order growth rate was 13 percent. It has now dropped to a negative 12 percent growth rate for the first quarter of fiscal 2014.

Switching

John Chambers CEO Cisco

One of the biggest areas of investment for Cisco in recent quarters has been its switching business. Chambers noted that during the first quarter, switching revenues grew by 3 percent. Last week, Cisco officially announced its Application Centric Infrastructure (ACI) initiative, which has the new Nexus 9000 switching family at the foundation.

"Developed by our recently acquired spin-in Insieme Networks, the Nexus 9000 began shipping in November and we will ramp over the coming quarters," Chambers said.

"When we look back five years from now, I believe we will see ACI as a pivotal point in redefining IT," Chambers said. "We designed the system in ACI that would address the most pressing needs of our best global customer base, companies, government and service providers of all size. "

Sean Michael Kerner is a senior editor at EnterpriseNetworkingPlanet and InternetNews.com. Follow him on Twitter @TechJournalist

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