This shouldn’t have come as a surprise. Communications infrastructure is absolutely central to the surveillance scandal, and that’s Cisco’s business. An American networking firm was never going to come out of this mess well – and the whole infrastructure business is in a state of upheaval anyway — but the figures are sobering nonetheless.
In the last quarter, on which Cisco was reporting on Wednesday, the company saw a sudden 21 percent revenue drop in its top 5 emerging markets: 25 percent down in Brazil, 18 percent down in India, Mexico and China, and 30 percent down in Russia.
Here’s Cisco CEO John Chambers on yesterday’s earnings call (as transcribed by Seeking Alpha):
“You look around the world, the emerging markets, I have never seen that fast a move in emerging markets and that is something that when I talk with our industry peers, while there are exceptions, most of my CEO counterparts can almost finish my sentence in terms of what’s occurring. It’s also occurring with many of our customers where if you were to talk about Brazil as an example, they can finish each other’s comments to CIOs about their business whether it’s the consumer business or whether it’s the manufacturing segment in terms of the direction.”
Brazil, of course, has produced some of the strongest reactions to the surveillance scandal, with President Dilma Rousseff promising to stimulate the local networking equipment industry (among other things) as a response.
Barclays’ Ben Reitzes said on Wednesday’s call that he and other analysts were “floored” by Cisco’s guidance, and asked specifically what part was being played by concern over NSA snooping. Chambers said there was “an impact in China” but the effect was “fairly nominal” across the total emerging country business. He suggested there was a wider “slowdown in these emerging markets both in the decision making and their economies.”
Cisco sales chief Rob Lloyd chipped in at that point to say the snooping scandal is “not having material impact but it’s certainly causing people to stop and then rethink decisions.”
Again, we have to remember that there are more factors at play here than the NSA – the financial crisis ain’t over yet. But, even just looking at this as an emerging markets problem rather than an emerging-markets-reacting-to-surveillance problem, these quotes from Chambers should raise the hair on many people’s heads:
“I would rather there have been a couple of countries… because then you can say let’s go fix them, and there are always a couple of countries that we’ll either have issues on, some we create ourselves, some of them are done to us, some of them are way beyond our control. But the consistency of that number is what concerned me. And we usually unfortunately see things a couple of quarters ahead of our peers…
“The fact that a player like IBM… has probably 60% of their business given in the quarter and saw that this extreme indicates what we think is going to be more of an industry phenomenon, not affecting everyone but currently affecting lot of people.”
If Cisco really is an industry bellwether, big problems lie ahead. Analysts had expected growth of 6 percent, not revenue decimation, and Cisco’s gloomy prognostication swiftly saw a 10 percent drop on the company’s share price in after-market trading