September 30, 2022

Cisco’s Profit Falls 36%

SAN FRANCISCO — Cisco Systems showed little sign of a turnaround in its latest quarter.

Cisco reported Wednesday that net income in the fourth quarter ended July 30 fell 36.3 percent to $1.2 billion, or 22 cents a share, from $1.9 billion, or 33 cents, in the same quarter a year ago.

The company said revenue climbed 3.3 percent to $11.2 billion, from $10.8 billion.

Weak spending by government agencies combined with slow decision-making has left Cisco adrift. But an overhaul that includes cutting more than 7,000 jobs and jettisoning products like the Flip video camera is expected to take time to lift the company’s results.

The company has long been considered a bellwether for technology spending, but its internal problems have made it a less reliable stand-in for the broader technology industry. Cisco makes routers and switches used by corporations and government agencies to operate data centers and telecommunications networks.

The adjusted income of 40 cents was above the expectations of Wall Street analysts. They had expected 38 cents a share and revenue of $10.98 billion on that basis, according to a survey of analysts by Thomson Reuters.

“We’ve made significant progress on our comprehensive action plan to position ourselves for our next stage of growth and profitability, while delivering solid financial results in Q4,” John T. Chambers, chief executive of Cisco, said in a statement. “As we start our next fiscal year, you will see a very focused, agile, lean and aggressive company, that is laser-focused on helping our customers use intelligent networks to transform their businesses.”

Cisco, based in San Jose, Calif., is trying to reverse its course after a nearly yearlong slump. The company has responded by cutting costs and overhauling its management structure to try to restore some its former glory. Last month, Cisco said it would cut 6,500 jobs through layoffs and buyouts along with selling a factory in Mexico. The company took a $772 million charge for the restructuring in the fourth quarter.

Those reductions come in addition to 550 jobs eliminated in April.

While Cisco struggled over the last year, smaller rivals like Juniper Networks performed relatively well. More recently, however, Juniper and Brocade Communications Systems, another maker of technology equipment, have warned of slumping demand for their products.

Cisco’s problems include a slowdown in spending by the public sector, which makes up around a fifth of its overall sales. Because of tight budgets, government agencies, public universities and hospitals are balking at buying big-ticket technology equipment, a situation that is not expected to change any time soon.

While Cisco’s main primary products face headwinds, some of its other businesses have shown strong growth in recent quarters, like phone systems, video conferencing and wireless products. Mr. Chambers is counting on these newer areas to lift the company as its more mature products make smaller gains.

But investors are focused on Cisco’s slow overall growth, and have sent the company’s shares down more than 40 percent over the last 12 months.

Shares of Cisco fell 33 cents, or 2.3 percent, to close at $13.73. They rose 41 cents, or 3.3 percent, in after-hours trading.

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British Distiller Diageo Shifts Its Focus in Acquisitions to Fast-Growing Markets

When the Beijing authorities last month finally allowed the deal between Diageo, the world’s largest liquor maker, and Shui Jing Fang to go ahead, Diageo’s chief executive, Paul S. Walsh, was in an airplane crossing the Atlantic. He plans to celebrate the acquisition, which could be worth as much as $1 billion, by sharing a shot of baijiu with his team in Singapore this week.

Like its rivals, Diageo, the British maker of Smirnoff vodka and Johnnie Walker scotch, is going after local spirits makers in faster-growing economies like China to make up for declining sales elsewhere.

Diageo is working on a new management structure it plans to announce in August that will allow it to better track local consumer trends in China, Africa and Latin America.

“These markets are getting to a size that they have real scale now,” Mr. Walsh said in an interview last week. “Rather than to call on the London office for support, they need to stand on their own feet.”

Mr. Walsh plans for half of Diageo’s sales to come from developing economies within the next four years. Diageo, which also makes Guinness and Ciroc vodka, generated 32 percent of sales from these markets in 2010.

To achieve that goal, Mr. Walsh says he plans to shift investments from the mature markets of Europe and the United States to the faster-growing regions.

“I need fewer sales people in Greece, and I need more sales people in Asia and Latin America,” he said, sitting in his office, the shelves of which are lined with special editions of Diageo brands, including Shanghai White, a baijiu-infused vodka it sells in Hong Kong and Macao.

Diageo’s profit rose 1.5 percent, to £1.63 billion, or about $2.6 billion, in 2010 from £1.61 billion a year earlier as growing demand for spirits in China and Latin America and for beer in Africa made up for slower growth in the United States and Europe.

Sales in the nine months that ended on March 31 fell 3 percent in Europe, as many consumers in Greece and Ireland stayed home rather than go to restaurants or bars.

Some analysts said Diageo’s push into Asia was long overdue because its French rival, Pernod Ricard, the world’s second-largest liquor company, had been quickly gaining market share there and had started to challenge Diageo’s No. 1 position. But with about £2 billion cash in hand, Diageo has a larger war chest for acquisitions than Pernod Ricard, which owns Absolut Vodka.

Still, acquisitions in developing markets can be complex, which the baijiu deal showed. They also are few and far between and sometimes expensive, analysts said.

“The level of competition is intensifying and the level of investment you have to make is high,” said Matthew Webb, an analyst at JPMorgan Cazenove in London. “It’s a good opportunity, but it’s not without risks.”

Local spirit brands in Asia were too small or unattractive for companies like Diageo seven years ago, Mr. Walsh said. Yet as disposable incomes among Asian households grow, so do local brands. “In these new markets there are no huge businesses to buy,” he said. “But I want to see more of these local deals.”

Diageo is now in takeover discussions with the family that owns Jose Cuervo, the world’s biggest tequila brand, that could be worth $2 billion. Diageo already distributes Cuervo.

Any deal would add to an already busy year for takeovers. In its largest deal since it bought some Seagram brands in 2000, Diageo agreed to pay $2.1 billion for the Turkish distiller Mey Icki in February. A month earlier, Diageo bought a 23.6 percent stake in Halico, one of the biggest spirits producers in Vietnam.

In June, the company took a 50 percent controlling stake in the Guatemalan rum producer Zacapa.

Some analysts said Diageo could also bid for Fortune Brand’s Jim Beam bourbon label to increase its market share in the United States. Mr. Walsh did not rule it out and said Diageo was being careful not to let its footprint in the United States diminish. But he said as far as acquisitions were concerned, his attention was now on emerging markets.

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Contrite Cisco Regroups Before Skeptical Wall St.

Cisco Systems, where he is chief executive, is in a slump. The management system he put in place slowed decision-making and innovation. The company’s growth has slowed and its profits are falling.

His latest sales pitch is that he can revive Cisco — a technology colossus that makes computer networking equipment — by pruning its sprawling business and refocusing on its strengths.

But investors, Wall Street analysts and customers are a little bit skeptical of Mr. Chambers’s promises. No major improvement in Cisco’s finances is expected when it reports third quarter earnings on Wednesday.  Given Cisco’s size, the scope of the overhaul and the increasing competition that is eroding the company’s market share, a turnaround could take time.

Last week, Cisco said it would reduce bureaucracy by eliminating a crazy-quilt management structure that had executives responsible for geographic regions as well as serving on “councils” that were supposed to encourage cooperation between the different groups. Instead, it slowed decision-making.  

Last month, Mr. Chambers, who declined to be interviewed for this article, took his first step to fix Cisco by suddenly shutting down its Flip video camera business. Only two years earlier, Cisco had acquired Flip’s parent company for $590 million to expand its nascent consumer products division. The camera was popular and, indeed, the company was days away from release of the latest version of the video camera.

“This isn’t simply a midcourse correction,” said Jeffrey Kvaal, an analyst with Barclays Capital. “They’re facing challenges that are multi-year.”

The doubt in Mr. Chambers’s sales pitch began last year when Cisco’s sales started to show weakness that Mr. Chambers initially attributed to the sour economy. When profits continued to wither quarter after quarter, Mr. Chambers alternately blamed a decline in government spending and a “transition” after the introduction of new switches for computer networks.

In the last 12 months, its shares have fallen 31 percent as the Nasdaq index gained 22 percent. While Cisco’s shares fell, those of its rivals like Juniper Networks rose 35 percent. Alcatel-Lucent’s shares doubled.

In April, in a memo to employees, Mr. Chambers acknowledged systematic problems at Cisco. He blamed slow decision-making and a lack of accountability. “We have disappointed our investors and we have confused our employees,” Mr. Chambers wrote. “Bottom line, we have lost some of the credibility that is foundational to Cisco’s success — and we must earn it back.”

The contrition is unusual for Mr. Chambers, who is known for his unwavering optimism during his 16 years leading Cisco. He has paused his cheerleading only once before — during the dot-com crash more than a decade ago, when Cisco was unprepared for customers sharply cutting back orders. Cisco had been one of the hottest companies of the Internet boom of the 1990s with a high-flying stock to match. Much of the blame for its shortcomings fell on Mr. Chambers, much as it does today.

The last few years should have been golden for Cisco. Telecommunications companies worldwide were rapidly expanding their infrastructure to accommodate growing traffic from online streaming and mobile phones.

But Cisco failed to keep pace with changes in the network switching and routing equipment, which accounts for nearly half its revenue. The industry has shifted from more standardized technology — a landscape in which Cisco thrived — to specialized equipment for various niche markets.

For example, Cisco’s market share in edge routers, used by Internet providers to route traffic near the edges of their networks, dropped 11 percentage points over three years to 42.2 percent in 2010, according to the Dell’Oro Group, a market research firm.

“They’ve been lagging,” said Shin Umeda, an analyst with the Dell’Oro Group. “As a result, the competitors have been able to move in.”

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