After beating street, street beats Cisco

Shares plunge more than 13% Thursday on concerns about shrinking margins

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Despite meeting expectations for second-quarter net income following Wednesday's market close, shares of Cisco Systems (NASDAQ: CSCO) plunged more than 13 percent in early trading Thursday after the networking equipment vendor issued a disappointing profit forecast and warned of a slowdown in government spending, a major source of the company's revenue.

(Also see: Cisco Systems shares absorb punishing beatdown)

Cisco shares fell early Thursday as far as 19.09, or 13.4 percent below Wednesday's closing price of 22.04. The plunge mirrored a similar nosedive following Cisco's first-quarter report last November, when shares fell more than 16 percent in the next day's trading (see link above).

Then, as now, investors were spooked by a weak sales forecast, shrinking margins and warnings from the company that governments at all levels, both here and abroad, were cutting back on spending.

The company on Wednesday reported Q2 net income of $1.52 billion, or 27 cents a share, down 17.9 percent from $1.85 billion, or 32 cents a share, in the year-ago quarter. Non-GAAP earnings for the quarter were $2.1 billion, or 37 cents a share, down 11.2 percent from $2.3 billion, or 40 cents a share, a year ago.

Revenue was $10.4 billion, up 6 percent from $9.8 billion in last year's Q2.

Consensus forecasts called for net income of 35 cents a share on sales of $10.3 billion.

Cisco's Q2 gross margin slipped to 62.4 percent from 64.3 percent a year ago. Analysts suspect the company's margins are being pressured by stiffer competition in the networking equipment sector spurred by a transition to a new generation of routing and switching platforms that yield smaller profit.

Several analysts downgraded Cisco's stock to hold from buy.

In a conference call following Wednesday's earnings release, Cisco chief executive John Chambers said, "Unfortunately, we believe that our concerns in the public sector will continue to be challenging in the developed world for the next several quarters. The challenges at state, local, and eventually federal level in our opinion will worsen over the next several quarters."

Not much to be bullish about there. Cisco, by the way, gets more than 20 percent of its revenue from the public sector.

Cisco said it expected third-quarter profit to be from 35 cents to 38 cents per share, below Wall Street expectations of 40 cents. The company forecast Q3 revenue to increase by 4 percent to 6 percent, in line with analyst estimates of 5 percent.

Chris Nerney writes about the business side of technology market strategies and trends, legal issues, leadership changes, mergers, venture capital, IPOs and technology stocks. Follow him on Twitter @ChrisNerney.

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