Cisco's dim outlook could signal trouble

SAN FRANCISCO - A gloomy outlook from Cisco Systems Inc. is shaking some investors' faith in the strength of the technology industry's recovery.

Corporations have loosened their purse strings after having slashed their budgets. Some governments have poured money into stimulus-fueled technology projects. Consumers are starting to snap up cell phones and gadgets again.

But Cisco revealed severe slowdowns in spending by state and local governments in the United States and by governments in Japan and Europe. That has investors worried that other companies will show similar trends when they next report earnings.

Cisco is a bellwether for the technology world because it is the world's No. 1 maker of computer-networking equipment, and because its quarterly results lag others' by a month, meaning it includes an extra month of sales that most other companies have not reported.

Cisco's stock got clobbered Thursday, and investors lopped off a sixth of Cisco's market value, annihilating $23 billion in shareholder wealth. The sell-off drove the tech-laden Nasdaq down, too.

Shaw Wu, an analyst at Kaufman Bros. L.P., said Cisco's results raise concerns about spending on information technology.

Cisco's results Wednesday provided buzzkill for an industry that has become accustomed to signs that a strong, broad recovery in technology spending is under way. The market's reaction was so forceful because the trends Cisco spotted contradict the sentiment expressed by other technology heavyweights.

Many other companies had raised their guidance recently. Then along came Cisco, whose networking products help manage the flow of Internet and other data traffic and are critical parts of the backbone of the Internet. Cisco is now calling for revenue for the November-to-January period to increase just 3 percent to 5 percent, less than half the growth rate that analysts expected.

One reason for the shortfall in state and local government spending is cost-cutting to balance budgets. That has taken longer in government than in corporations, which tend to clamp down on spending almost instantly when times get tough.

Jayson Noland, an analyst with Robert W. Baird & Co. Inc., said he had not heard worries from Cisco resellers about the strength of state-government orders before Cisco's earnings report Wednesday for the fiscal first quarter. He noted that federal spending had remained strong, but that it now appeared that states and municipalities were imposing the same kind of deep cuts that corporations imposed at the start of the recession.

"When something goes wrong in the corporate world, they lock it up quickly," he said. "I don't feel like state and local governments really act until it's the eleventh hour."

The cuts are likely to spill over into other sectors beyond technology, he added.