Arik Hesseldahl

Recent Posts by Arik Hesseldahl

Cisco Probably Took a Hit From the Federal Shutdown

Shutterstock / Andrea Izzotti

Networking giant Cisco Systems will report its quarterly results after the markets close for trading in New York later today. While it’s expected to turn in relatively solid numbers, there’s the possibility that earnings will come in at the lower end of previous guidance, mainly because of the federal government’s 16-day shutdown last month.

Cisco doesn’t break out its sales in such a way that you can easily tell how much of its revenue comes from sales to the U.S. government, but it’s safe to say that it’s important. Government agencies buy a lot of networking equipment and, historically, the quarter ending in October has been an important one for Cisco because of the way the budget cycles at those agencies tend to work.

That means a slower-than-usual federal sales segment is likely to drag down what will otherwise be a fairly positive quarter, writes analyst Sanjiv R. Wadhwani of Stifel Nicolaus in a note to clients circulated earlier this week.

“Our Cisco enterprise checks in the U.S. have generally been positive, especially on the switching and Wi-Fi side,” Wadhwani wrote. “However, with the federal shutdown in early October and emerging market headwinds, we believe that the quarter is likely to come in at the low-end of guidance of three percent to five percent year-on-year growth.”

The consensus view of Wall Street analysts calls for Cisco to deliver 51 cents per share in earnings on revenue of $12.4 billion, and to give guidance for 52 cents a share on revenue of $12.6 billion in the quarter ending in January.

Wadhwani trimmed his estimates for both quarters. He said he now expects Cisco to earn 50 cents on $12.2 billion on the quarter reported today, and 51 cents on $12.4 billion in the January quarter.

One big hint: The electronics supply chain. Of the 21 component suppliers and distributors that Stifel tracks, only two had good quarters, and some of the misses were blamed on the federal shutdown, others on slowdowns in spending by big companies. If demand for the kinds of parts that go into networking equipment is down at companies like Broadcom and Cavium, Wadhwani believes that’s reason enough to worry about Cisco.

He’s still generally positive on Cisco, and rates it a “buy,” given its mix of dividends and share buybacks, and what he calls “solid execution in the face of an uneven economic recovery.” Just a little less positive than before.

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