Cisco: Signalling short-circuit

When your stock tumbles one-tenth after a stunningly weak forecast, no-one is going to dwell on a Freudian slip of the business variety. But listen to Cisco's earnings call and you'll hear John Chambers talk about how the Washington shutdown "exasperated" a lack of confidence among business leaders. Look at the tech giant's numbers, and beltway politicking is the least of its frustrations.

The DC shenanigans knocked $50m, or 1 per cent, off sales. What wiped $13bn off Cisco's capitalisation in after-market trade was its prediction that revenues would fall by up to one-tenth in the current quarter, based on weak emerging markets. The last time its top line fell so sharply was in the aftermath of Lehman's collapse.

When a chief executive with Mr Chambers' longevity (18 years and counting) says he has never seen that fast a move in emerging markets, the real question is this: is this just a poor quarter in what Cisco terms an "inconsistent" economic environment, or a longer-term trend of higher volatility? The risk has to be the latter.

Some lumpiness from emerging markets is to be expected. The striking thing is that Cisco did not see this coming, implying that its normal signals are not working. Six months ago, its emerging market sales were rising 13 per cent year-on-year. Now, they are running 12 per cent lower. China, where they slumped 18 per cent compared with a year ago, was affected by politics, namely the issues raised through Edward Snowden's whistleblowing. But China was not in fact a standout problem: revenues in India, which had been growing at a one-third year-on-year rate earlier in 2013, were as weak as in China.

Cisco's numbers are not an absolute disaster. Its US business - half of sales - is stable and overall it expects steady gross margins in spite of lower sales. The after-market reaction may not have been so severe had the stock not started rallying late in October - a move that looks ironic given that was just the point that Cisco's order book was failing to meet targets. The shares will continue to be underpinned by the fact the company is a cash-laden giant with a compulsive buyback habit. But if unpredictable sales are the new norm, then more market volatility of the sort seen in Wednesday can be expected.

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