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Cisco's Got Problems on Every Front


Let's see how its competitors are dealing with challenges in Asia, Europe and the US.

Poor Cisco (NASDAQ:CSCO).

It couldn't have been easy for a multinational Internet infrastructure company to stay nimble in a quarter that included a US government shutdown, a European debt crisis, and ominous rumblings from China that could signal either a massive policy shift or a brief hissy fit.

We found out this week that Cisco, faced with those challenges, did a pratfall. It doesn't expect to pick itself up in the current quarter, either.

But what about some of its major competitors in related Internet technology businesses, like Juniper (NYSE:JNPR), IBM (NYSE:IBM) and Ericsson (NASDAQ:ERIC)?

In short, is this Cisco's problem, or everybody's problem?

After all, none of the above issues were really resolved. The US government reopened, but "sequestration" cuts continue to hamper public spending. Europe may or may not be emerging from its crisis. And even a hissy fit from China can have long-term repercussions.

First, the Cisco story: On Wednesday, the company reported lower-than-expected revenue for its most recent quarter. But the big shock was the forecast. The world's largest computer networking equipment company expects a sales decline of 8% to 10% in the current quarter, from the same period a year ago. Analysts had been expecting 4% growth.

The company's stock tanked on Wednesday, closing down almost 11%, to $21.37.

Cisco executives cited a litany of problems, including economic weakness in Europe, Asia, and the emerging nation economies, combined with cautious corporate spending overall.

In the long run, the Chinese issue seems to be the biggest threat to Cisco and its Western competitors.

China seems to be embarking on a distinct "buy Chinese first" campaign, and is urging local companies to go with homegrown Huawei (SHE:002502) or ZTE (SHE:000063) products.

That may resonate with the Chinese consumer, too. ZTE was proud to announce its role in making the online shopping event known as China Singles Day a success for retailer Alibaba on Nov. 11.

If there's a hint of xenophobia here, it's not one-sided. China resents US attempts to characterize its technology companies as a threat to American security and economic health, as was suggested in a document issued by a Congressional intelligence committee last year.

According to an analysis by The Heritage Foundation, the report concluded that Huawei and ZTE "should not be considered reliable partners" for work that involves sensitive systems.

The Chinese government resents that report all the more after a steady stream of recent accusations that a US security agency is spying on private communications around the world, using some American technology companies, with or without their cooperation. (The reports are disputed by the companies and the US government.)

If that's a problem for Cisco, it ought to be a bigger problem for IBM, which now earns a quarter of its revenue in emerging markets.

And it is. IBM, in its latest earnings report, said a slowdown in spending in the Asia Pacific region was the biggest factor in its revenue decline of $300 million for the quarter. Its business in China alone was down 22%, and in the region as a whole it was down 5%.

Juniper seems to have found a better balance among competing problems in its latest quarter. In its latest quarterly report, released last month, the company said revenues from the Asia Pacific region were down 8% year-over-year, but revenues from the Americas were up 18%.

Overall, the company surpassed analysts' estimates for the period, with net income of $99.1 million, or $0.19 per share, and revenue of $1.186 billion.

Looking ahead, the company said it expected the current quarter to reflect continued strong demand from service providers, with some improvement in the enterprise segment. It said it is "carefully monitoring" the effects of federal spending cuts.

Ericsson, which is a Swedish company, had yet another variation on the theme. It saw a 28% drop in sales in northeastern Asia, its second-largest region. But that was offset by projects on its home turf. Sales in western and central Europe increased 21%.

Ericsson executives attributed the gains to greater investments by European companies in high-speed data networks, after years of postponing improvements.

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