February 11, 2016 / 8:39 PM / a year ago

Earnings bolster Cisco, but raise concerns for broader IT spending

4 Min Read

The Cisco Systems logo is seen as part of a display at the Microsoft Ignite technology conference in Chicago, Illinois, May 4, 2015.Jim Young

SAN FRANCISCO (Reuters) - Networking giant Cisco Systems Inc reported it is weathering a global slowdown in information-technology spending, but signs potential customers are putting some projects on hold exacerbated concerns about broader IT growth.

Cisco shares rose 10 percent on Thursday, bucking the overall market after it set a profit target in line with Wall Street expectations despite the weaker spending it noted around the world by businesses. The company also cut targets three months ago, moderating Wall Street expectations.

Cisco Chief Executive Chuck Robbins on Wednesday told analysts that customers in January “paused a bit” as they evaluated the economy. Spending on key projects continued while more optional ones were put on hold.

Analysts took that as a bad sign for some technology companies.

“This was really a litmus test for all of IT spending,” said Sun Trust analyst Inder Singh about Cisco’s comments. “When they speak, and they talk about a slowdown, and a deceleration, usually it affects the broader market.” Cisco's guidance was "prescient in terms of affecting other companies," he added.

Cisco reported weakness in data centers and switching. Some analysts saw potential trouble for other data-center products such as networking, servers, storage, and virtualization.

Shares in storage company EMC were down 1 percent on Thursday. Shares of IBM, which makes servers and sells other related services, were down 2 percent. HP Enterprises, which sells server products, fell 5 percent in a generally weak market.

Conversely, Cisco said demand for security and next-generation data centers, which rely more heavily on software than traditional data centers, withstood the downturn. Shares of Arista Networks, which makes next-generation data center switches, showed slight gains Thursday. The company reports earnings next week.

One believer in next-generation data centers, insurance company Assured Guaranty, has upgraded its facilities by replacing separate components with all-in-one hardware and software from Westborough, Mass.-based SimpliVity. The new system includes components from Cisco.

“The busywork is gone,” said Jason Elizaitis, Assured’s director of IT operations, who said the system also cost 50 percent less to buy than replacing the previous one.

Still, such business remains a relatively small part of the overall IT market.

Global IT spending is slated to rise 1.7 percent this year, but Gartner analyst Richard Gordon says the research firm may revisit that estimate.

“I would not be surprised to see our forecast for IT spending growth decline in our next update due to increased macroeconomic concerns, geopolitical worries and market volatility creating negative business sentiment,” he said, adding he wasn’t expecting a “dramatic slowdown” due to the essential nature of technology spending.

Many chief information officers are likely searching for ways to save money short term that will not get in the way of overall long-term planning, said Ralph Loura, formerly chief information officer at HP. But that tactic might change.

“Once the pressures on cost persist for an extended time or are a significant enough inflection point,” he said, “then you revisit core strategy.”

Reporting by Sarah McBride; Editing by Peter Henderson and Andrew Hay

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