Cisco shares fall on economic, competition worries

Last Updated: Tue, Jul 24, 2012 18:30 hrs

Cisco Systems tumbled 6 percent in Tuesday trading amid concerns about a possible sales slowdown and a threat to from rapidly growing business software maker VMware Inc.

THE SPARK: After the market closed Monday, Cisco said it would lay off about 1,300 workers to simply its operations and adjust to an uncertain business climate.

The 2 percent work force reduction at the computer networking equipment company comes a few months after CEO John Chambers warned that some major customers are growing increasingly hesitant to spend a lot of money on technology with the debt crisis in Europe a potential trigger for another global recession.

Cisco's decision to jettison workers could be interpreted as a sign that the company is trimming expenses to bolster its earnings as its braces for more turbulence ahead. Chambers is expected to update his vantage point on the economy Aug. 15 when Cisco reports fourth-quarter earnings.

And VMware late Monday announced plans to buy computer networking upstart Nicira for $1.26 billion in a deal expected to close later this year. Like VMware, Nicira specializes in the hot field of computer "virtualization" — a technique that enables companies and government agencies to get more use out of single machine of networking system.

Nicira's technology can create tens of thousands of "virtual" computer networks using less hardware, a breakthrough that could conceivably reduce demand for Cisco's gear in the future. The threat posed by Nicira looks more imposing now that it is about to become part of VMware, a computer virtualization pioneer that already has lined up a long docket of corporate customers. In addition, VMware is controlled by an even larger vendor of corporate technology, data storage equipment maker EMC Corp. — giving Nicira another entree to customers who have been buying Cisco's products.

As it is, 5-year-old Nicira already has sold its technology to client list that includes AT&T Inc. and eBay Inc. The appeal of creating a vast number of virtual networks is expected to widen as more companies embrace the notion of "cloud computing" — the notion of storing information in data centers that can be accessed by workers wherever they are, as long as they have an Internet-connected device.

ANALYST TAKE: ISI Group analyst Brian Marshall views the Nicira purchase "as one of the most strategic moves in technology in recent years with wide-ranging ramifications for networking and cloud computing."

Pacific Crest Securities analyst Brent Bracelin thinks VMware's acquisition will undercut Cisco's sales of networking switchers and routers, a segment that accounts for roughly half of the company's revenue. "The move pressures further diversification at Cisco," Bracelin wrote in a Tuesday note.

SHARE ACTION: Shares of Cisco Systems Inc. fell 93 cents to $15.14 in Tuesday's afternoon trading. The shares have ranged from $13.30 to $21.30 in the past year.

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