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Cisco cuts long-term revenue, earnings targets

A Cisco office is pictured in San Diego, California November 12, 2012. REUTERS/Mike Blake
A Cisco office is pictured in San Diego, California November 12, 2012. REUTERS/Mike Blake

By Sinead Carew and Nicola Leske

NEW YORK (Reuters) - Cisco Systems Inc on Thursday cut its longer-term earnings and revenue growth targets due to problems in emerging markets, conservative customer spending and stalling growth in its core business of network equipment, the latest in a drumbeat of bleak developments at the Silicon Valley company.

The company's shares fell as much as 3 percent to a seven-month low after it cut its three- to five-year revenue growth target to a range of 3 percent to 6 percent at its analysts' meeting. Its previous range was 5 percent to 7 percent.

Cisco, which issued a warning on November 13 that revenue would decline in the current and coming quarters, also reduced its target for earnings-per-share growth to a range of 5 percent to 7 percent for the same period from its previous target of 7 percent to 9 percent.

Chief Financial Officer Frank Calderoni said revenue in Cisco's core network equipment business would be flat to up 1 percent in the same time frame. He promised higher growth in areas such as software, services and security products.

BMO Capital Markets analyst Tim long said that while Cisco was seeing exciting growth in some areas, he saw the slump in growth in its core router and switch market as a "big disappointment."

ISI Group analyst Brian Marshall said Cisco's new targets were more realistic given the challenges it is facing.

In response to analyst worries about how much of Cisco's troubles were specific to the company as opposed to industry-wide, Chief Executive John Chambers said Cisco tends to suffer from macro issues ahead of rivals.

"We are the canary in the coal mine," Chambers said, noting that the company often sees problems two to three quarters ahead of peers. But Chambers told reporters that it also means Cisco benefits from improving economies more quickly than other companies.

Chambers said he was beginning to see the U.S. market recover but cited challenges in emerging-market economies such as Russia and Brazil. "If the U.S. does well we'll pull the rest of the world out of this," he told reporters after the meeting.

While emerging markets were "extremely challenged" right now, Chambers said, he expects Cisco to grow in those regions, when they recover, by 6 percent to 10 percent.

For the U.S. market, Chambers cited strong growth prospects in the enterprise market, as its sales pipeline for big deals of between $1 million to $5 million in that segment is up 20 percent or more. Enterprise customers account for about 23 percent of Cisco's overall revenue.

Cisco stunned the market last month by warning that revenue would fall as much as 10 percent this quarter and could keep declining for several quarters. The company blamed factors from emerging-economy weakness and political backlash in China to company-specific problems, such as market-share losses in network equipment and declining sales of set-top boxes.

Chambers said it would take some time for the company to work out its issues in China, but he said Cisco would compete in China for the long term.

Aside from emerging markets, Cisco's biggest problem in the quarter ended in October was a 13 percent decline in sales to service providers, which represent about 31 percent of overall revenue.

Chambers said the drop in demand from service providers included a 6 percent decline in sales of set-top boxes, a 2 percent decline relating to its launch of new products and a 2 percent decline due to a loss of market share in equipment used at the edge of operator networks.

Some investors were hoping Cisco would provide a detailed plan on Thursday for the future of its set-top box business where it has decided to forgo some sales of less-profitable products. Some people are hoping it exits that market.

But Rob Lloyd, president of development and sales, said the company is "not getting out of set-top boxes."

The executive said that while the business is putting pressure on revenue, the company wants to keep those products so they can provide them to bigger customers as it tries to switch focus to other products for video service providers.

However Lloyd told reporters that the switch in focus from set-top boxes to more profitable products would be a "multi-year transition for Cisco" involving more revenue declines. He did not say when Cisco's video business would return to growth.

Cisco shares closed down 1.8 percent at $20.51 on the Nasdaq, up from an earlier low at $20.26. The shares closed at $24 the day before Cisco's November 13 revenue warning.

(Editing by Bernadette Baum, Meredith Mazzilli and Matthew Lewis)

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