Cisco Shock Spurs Debate on Industry Changes

Cisco Systems Inc. Chief Executive John Chambers sees a few tough quarters ahead. Others see more lasting issues.

The Silicon Valley technology bellwether on Thursday lost 11% of its market value—worth more than $14 billion—the day after Cisco missed its first-quarter sales target and projected its first revenue decline in four years in the current period.

Cisco, the biggest supplier of networking equipment, laid much of the blame on a surprise drop in orders in five emerging economies, along with some softness in sales to telecom carriers and other service providers. Mr. Chambers said those big customers held up some purchases as they evaluate some of its new networking products, a customary process that is being amplified by economic uncertainty.

“If people’s budgets are being squeezed, they’re going to say, ‘can I wait another six months?’ ” Mr. Chambers said in an interview Wednesday.

But some competitors and former Cisco executives see other reasons for customers to reconsider their spending plans—in particular, the effects of long-term technology changes that could work to the advantage of rivals.

“There are fundamental changes that are really causing everybody to rethink how they build their networks,” said Brad Brooks, chief marketing officer at rival Juniper Networks Inc.

For one thing, Mr. Brooks and others say, some corporate customers and service providers want to borrow more tactics from companies like Google Inc. and Facebook Inc., which have held down costs by scaling up massive data centers from inexpensive components.

Many of those companies try to handle more of their networking functions in software, running either on standard server systems or widely available networking chips. Mr. Brooks said some customers in emerging countries are particularly aggressive about some of the new approaches, since they have little installed base of conventional networking hardware.

Competitors like Arista Networks Inc. have been successful by emphasizing software innovations, in large part by targeting Web-oriented customers. Cisco, last week announced new switching products that embrace elements of the software-based strategy, but the company also stressed the benefits of developing its own networking chips.

In other parts of its business, like videoconferencing, Cisco faces rivals that offer that capability as an online service rather than trying to sell hardware.

“In emerging markets that are price-sensitive, customers are going to be looking at alternative ways of doing things,” says Krish Ramakrishnan, a former Cisco executive who is now CEO and co-founder of Blue Jeans Network, which offers competing videoconferencing services from its own data centers. “That is the direction the industry is going.”

Cisco on Wednesday projected revenue would decline 8% to 10% in the current quarter, while some Wall Street analysts had expected sales to rise 4% to 6%. The company’s shares dropped $2.63 to $21.36 Thursday.

“It was a bit of a train wreck, to be kind,” said Mark McKechnie, an analyst at Evercore Partners.

Simona Jankowski, an analyst at Goldman Sachs, removed Cisco from what the firm calls its Americas Conviction Buy List, because “the near-term macro challenges and product transition disruptions are much worse than we anticipated.” She estimated that two-thirds of Cisco’s revenue shortfall was due to company-specific factors, rather than economic factors that could face other companies.

Mr. Chambers, for his part, insisted the company is positioned to exploit the new trends. “Our innovation engine is doing extremely well, and we just have to power through the cycle that we are in,” he said.

There was little immediate sign that his job is in jeopardy. Mr. Chambers told CNBC Wednesday that he expects to stay CEO for two to three years, within a range of prior predictions he’s given.

Cisco’s board supports that timetable, a person close to the situation said.

–Joann S. Lublin contributed to this article.