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UPDATE 3-Cisco warns US spying fallout hitting revenue in China

Sinead Carew
Wednesday, 13 Nov 2013 | 9:19 PM ET

(Adds executive comments, background on NSA spying issue, share price update)

NEW YORK, Nov 13 (Reuters) - Cisco Systems Inc warned its revenue would dive as much as 10 percent this quarter, and keep contracting until after the middle of 2014, as a backlash against U.S. government spying contributed to plummeting demand in emerging markets like China.

The hit comes after former U.S. spy agency contractor Edward Snowden exposed widespread surveillance by the National Security Agency - in particular through Internet data, much of which is transmitted via Cisco's network equipment.

China's Ministry of Public Security was reported in August to be on the verge of launching a probe into Cisco rivals including IBM Corp, Oracle Corp and EMC Corp over security issues.

The scandal has also reverberated in other emerging markets the NSA is said to have spied on including Brazil, Mexico, and India.

Cisco shares fell more than 10 percent in late trade after it also missed its revenue target for its fiscal first quarter just ended, where it saw a big drop in sales to telecom and cable service providers as well as in emerging markets.

Chief Financial Officer Frank Calderoni said Cisco was most affected by the political backlash in China but noted that it was difficult to quantify how much of its revenue shortfall was due to politics versus macroeconomic trends.

"Between economic and political issues that are occurring in emerging markets we had a significant impact," Calderoni told Reuters in an interview.

Cisco said revenue in its top five emerging markets declined 21 percent led by a 30 percent drop in Russia, a 25 drop in Brazil and an 18 percent drop in both Mexico and China. One of Cisco's biggest rivals is China's Huawei, whose equipment has been shunned by the U.S. due to government concerns about possible Chinese espionage.

'REALLY TOUGH'

Cisco Chief Executive John Chambers told analysts on a conference call that in other countries, where the political impact was nominal, Cisco was seeing a slowdown due to macroeconomic countries.

Cisco is seen by investors as a strong indicator of the general health of the technology industry because of its broad customer base.

IBM, which has a similarly broad base in technology services, last month reassigned the head of its growth markets unit after a surprisingly steep drop in quarterly hardware sales in China.

"I'm floored by the guidance," said Northland Capital Markets analyst Catharine Trebnick, noting that Cisco seemed to be suffering from tough competition from lower priced rivals as well as broader economic issues.

Cisco blamed a 13 percent decline in service provider revenue on a delay in router sales due to its launch of new routers, as well as a drop in sales of set-top boxes when it decided to forego less profitable contracts.

"The last two weeks of the last quarter was really tough," Chambers said.

Cisco was also hurt by domestic issues. Chambers said that, while a recent partial U.S. federal government shutdown directly cut a smaller than expected $50 million off Cisco's revenue, it also further sapped confidence among non-government customers.

SOFTENING THE BLOW?

Cisco shares fell to $21.51 in late trade after the company released financial targets that shocked analysts and investors. The stock closed at $23.99 on Nasdaq and had already fallen 9 percent since its last quarterly report in August.

Cisco said revenue grew only 2 percent to $12.09 billion in its fiscal first quarter ended Oct. 26, from $11.88 billion in the year-ago quarter, below analysts' average estimate of $12.34 billion, according to Thomson Reuters I/B/E/S.

The company itself had forecast growth of 3 percent to 5 percent in the quarter.

It forecast a revenue decline of 8 percent to 10 percent for the second quarter and said that it was targeting a return to revenue growth in the first quarter of its fiscal year 2015.

To soften the blow, Cisco announced on the same day that its board had authorized up to $15 billion in additional repurchases of its common stock.

Cisco's profit dropped to $2 billion, or 37 cents per share from $2.09 billion, or 39 cents per share.

Excluding unusual items the company earned 53 cents per share compared with Wall Street expectations of 51 cents per share, according to Thomson Reuters I/B/E/S.

It said second-quarter earnings per share (EPS) would be in a range of 45 cents to 47 cents and forecast EPS of $1.95 to $2.05 for the full fiscal year 2014, which will end in October.

(Reporting by Sinead Carew,; Editing by Christian Plumb, Richard Chang and Alex Richardson)

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