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Why Did Cisco Systems Post Lower Guidance for Fiscal 2Q16?

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Nov. 16 2015, Updated 8:08 a.m. ET

Cisco posts lower fiscal 2Q16 guidance

Previously in this series, we saw that Cisco Systems’ (CSCO) rebound in its Switching business, as well as strong growth in its Data Center and Collaboration products, boosted the company’s revenue in fiscal 1Q16. However, like all traditional IT firms, Cisco has been hit by the changing IT landscape, which is moving toward the cloud.

Cisco expects its revenue growth to slow from 4% YoY (year-over-year) in fiscal 1Q16 to 0%–2% YoY in fiscal 2Q16. The company expects its EPS (earnings per share) to be in the range of $0.53–$0.55 in fiscal 2Q16. This is below the analysts’ expectation of 5% revenue growth and $0.56 EPS. Let’s look at the factors that could hamper the company’s growth in fiscal 2Q16.

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China’s macroeconomic environment

In an interview with Fortune, Cisco’s chief financial officer, Kelly Kramer, stated that the company earns 4% of its revenue from China (FXI), up from 3% in September 2015. The company reported a 40% growth in orders from China and India, and a 8% decline in orders from the rest of the Asia–Pacific region.

This is due to China’s devaluation of its currency, the yuan, which made its exports cheaper. This encouraged other countries in the region to reduce their purchases of foreign-made products. This impacted the revenues of Cisco and its competitors IBM (IBM) and Hewlett-Packard (HPQ).

Issues in China

Cisco has made huge investments in China to boost growth. However, these investments were affected by the Chinese government’s push to discourage domestic businesses from buying US-made networking technology due to national security concerns.

In a move to improve relations with China, Cisco entered into a partnership with Chinese server company Inspur in September 2015. It has also committed to invest ~$10 billion in the nation over the coming years to boost the domestic high-tech industry and create jobs.

Acquisition and partnership

Cisco has long utilized strategic acquisitions to expand its portfolio and boost its growth. The company’s new chief executive officer, Chuck Robbins, has adopted a different multipronged approach:

  • Cisco divested some businesses.
  • The company formed strategic partnerships with Ericsson (ERIC), Inspur, and Apple (AAPL).
  • Cisco closed three acquisitions and announced four new acquisitions.

With these acquisitions and partnerships, Cisco looks ready to tap the cloud and security space.

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