Damage to the US tech companies

Wolf Richter NSA Spying Crushes US Tech Companies in Emerging Markets (“An Industry Phenomenon,” Says Cisco’s Chambers)

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Wolf Richter: NSA Spying Crushes US Tech Companies in Emerging Markets (“An Industry Phenomenon,” Says Cisco’s Chambers)
Yves here. One amusing theme in this post is how the NSA is Cisco’s Lord Voldemort, the one who must not be named….

By Wolf Richter, a San Francisco based executive, entrepreneur, start up specialist, and author, with extensive international work experience. Cross posted from Testosterone Pit.

Cisco CEO John Chambers had a euphemism for it during the first quarter earnings call: the “challenging political dynamics in that country,” that country being China. But then there was India and others, including Russia where NSA leaker Edward Snowden is holed up, and where sales outright collapsed.

It led Cisco to chop its guidance. Overall revenues, instead of rising, would drop 8% to 10%. Or, as Tal Liani, an analyst from Bank of America, pointed out during the call, by “11% sequentially,” the worst since January 2009 when “the world was about to collapse.”

It was in between the lines everywhere, but never once did Chambers, or anyone else on his team, mouth the acronym NSA. It was off limits. And that’s exactly how another tech giant, IBM, had dealt with its own China revenue fiasco.

During IBM’s earnings call a month ago, CFO Mark Loughridge tried to put a positive spin on it but got tangled up in rigmarole that no one believed. In China, hardware sales, nearly half of IBM’s business there, had fallen off a cliff: “We were talking 40%, 50%,” he said. They’d expected to see double-digit growth rates! Sales had collapsed so fast that IBM didn’t even have time to concoct a credible excuse – but like Cisco, it never once mentioned the NSA [my take.... NSA Revelations Kill IBM Hardware Sales in China].

Clearly, these tech heroes of ours are trying not to point the finger (too obviously) at one of their largest customers, the US government, and particularly not at what they only call the Customer whose ballooning budgets fill the big trough they all feed on.

So Chambers touted in advance the “many positives” that would crop up during the call…. “That said, we are managing through several cycles in our business,” he added. “First, emerging market weakness….” Because in the emerging markets all heck had broken loose.

But before venturing into it, he summarized the glorious quarter Cisco had had: non-GAAP earnings per share and operating margins, operating cash flow, the farce of the $2.9 billion that had been “returned” to shareholders, mostly through share buybacks… everything was hunky-dory. “The one obvious exception is our revenue growth,” he said.

Up a measly 1.8%. Despite the incessant stream of acquisitions with which Cisco, like so many revenue-challenged tech companies, tries to prop up its numbers. Since July 1 alone, it completed five acquisitions. And organic growth? Total headcount grew by 100 in the quarter, to 75,136. But that includes the people who came with the acquisitions – 850 from Sourcefire and Composite Software alone. Those add-ons were offset by “workforce rebalancing” in its existing businesses, Chambers said.

There’d been some ups and downs. The set-top business, for instance, dropped over 20%, the data center business jumped 44%. There’d also been some product transition issues. While US enterprise and commercial orders were “very, very strong” with growth in “the high single digits,” orders from service providers plunged 13%. Geographically, orders declined 2% in the Americas and 4% in Europe, the Middle East, and Africa (EMEA). And then there were the emerging markets.

“Our top five emerging markets declined 21%,” Chamber said, “with Brazil down 25%, Mexico down 18%, India down 18%, China down 18%, and Russia down 30%.

How fast has the collapse happened? Cisco had already been struggling in China a year ago, when business was “flat.” Chambers had explained at the time that China was “very important” to Cisco. “We have invested a lot of resources in innovation in China for the last 20 years, and our commitment to China has not changed in any way,” he’d said. But China is home to some of Cisco’s largest competitors, Huawei and ZTE – whose forays into the US have been blocked by Congress for security reasons. Cisco was feeling the heat from that imbroglio – but it thought that problem would go away in a couple of quarters.

In Q4, ending July 31, after the Snowden revelations had been ricocheting around for months, the China business fell 6%. “China is a little bit unique to Cisco because of some of the issues going on, which you all are aware of,” he’d said during the earnings call on August 14, once again refusing the utter NSA. Three months later, due to “the challenging political dynamics in that country?” An 18% plunge.

Business in India, the “highlight in Asia-Pacific,” as Chambers had called it three months ago, had been up a dizzying 19% during Q4. Three months later, a stunning reversal: down 18%.

A year ago, Brazil was a star: orders had jumped 24%! By Q4 this year, orders were flat. Then revelations pushed Brazil center-stage in the spying scandal, and it had an allergic reaction. The government is even trying to force Google and others to keep Brazilian data in local data centers, not spread around the world. It would require the reengineering of the internet. And during that quarter, orders plunged 25%!

And Russia, where Snowden is trying to find new footing? Already damaged from the revelations, business in Q4 had been “approximately flat.” But now it plummeted 30%, the worst of any major market in Cisco’s book.

When an analyst pushed on that point, Chambers began to dance around it, tried to minimize it, blaming neither the revelations nor the NSA itself. He never even mentioned the NSA – though the analyst had named it. He did admit that “it” had “an impact in China,” something “we’re all aware of.” But Russia and the rest? Quasi denial. “It” had a “fairly nominal” impact on the total emerging markets, he said.

Rob Lloyd, President of Development and Sales, further tried to obscure and illuminate it: “So it’s not having material impact, but it’s certainly causing people to stop and then rethink decisions. And that is, I think, reflected in our results.” And those results in Russia were beyond abysmal!

“I’ve never seen that fast a move in emerging markets,” Chambers said.

His industry peers were seeing the same thing. “Most of my CEO counterparts can almost finish my sentences in terms of what’s occurring,” he said. He even mentioned IBM. It’s “an industry phenomenon,” he said.

The collapse in the emerging markets – “We believe that more than half the world’s GDP occurs there,” he said – was “very consistent across the board.” And that consistency is what he was fretting about. “We usually, unfortunately, see things a couple of quarters ahead of our peers. This time we were a little bit surprised.”

In the top five emerging markets, the “softening” started in Q4, “when we said they went from 13% growth the quarter before to flat in Q4. The other 15 countries continued to grow in the low teens. This time, all of them came down, and so out of our top 10, it was pretty brutal on that.”

The NSA’s reckless all-encompassing spying, and its hand-in-glove multi-billion-dollar collusion with US tech companies to accomplish it, is now wreaking havoc on these same tech companies. Revenues are getting crushed overseas. Emerging market governments and companies are looking at other options. Trust that has taken decades to build has evaporated. A study in early August estimated that the spying scandal would cost US tech companies $35 billion. Which might not even be enough for a down-payment: alone that 11% drop in Cisco’s stock today cost shareholders $16 billion.

It’s not a temporary issue. New revelations bubble to the surface all the time to complete the picture of a seamless, borderless, nearly perfect surveillance society. One dimension: the NSA and British GCHQ secretly break into the “clouds” of US companies to syphon off user data on a large scale. Illegal in the US. But the cloud is worldwide. Read….. NSA Secretly Breaks Into The Cloud Of US Tech Companies, Siphons Off Data, Fouls Up Revenues Overseas


Read more at http://www.nakedcapitalism.com/2013/11/wolf-richter-nsa-spying-crushes-us-tech-companies-in-emerging-markets-an-industry-phenomenon-says-ciscos-chambers.html#6VKs0kGReyfDJRrf.99

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Last modified: March, 12, 2019