Until CEO John Chambers gave that warning, analysts were expecting revenues to grow next quarter.
Bank of America Merrill Lynch's Tal Liani calculated that this drop in revenue is the biggest drop in 13 years, except for January 2009, "and at that time the world was about to collapse," Liani said during the quarterly conference call.
Chambers said on that conference call that Cisco was struggle in emerging markets, particularly China, where he had "never seen" such a falloff in orders.
The top five emerging markets "declined 21% with Brazil down 25%, Mexico down 18%, India down 18%, China down 18%, and Russia down 30%," he said during the quarterly conference call.
While he said the NSA spying scandals was impacting Cisco's sales in China a little, the true culprit, in his mind, was a sluggish U.S. economy, he told Maria Bartiromo on CNBC's Closing Bell.
The U.S. is "looked upon" as the world's economic engine, he said, and it needs to help cash "flow back into those countries ... then you begin to get more growth," he said.
Analysts don't blame the U.S. economy for Cisco's woes. Some of them think that Cisco hasn't come up with a good plan to address a new, game-changing way to build networks called
Cisco is known as the Cadillac of network equipment providers, high performance, high margins, and high price tags. That doesn't fly as well in cost-conscience emerging markets. SDN will help them save money. It takes features out of network hardware and puts it in software. Companies need less network hardware and less-expensive models. They can buy it from competitors like Juniper, HP, or Huawei. The SDN software can come from market leader VMware, startups like Big Switch Networks, or competitors like HP.
Cisco this month introduced its SDN product, but it's complex and requires customers to rip out their current Cisco network gear and buy new stuff that could be equally (or more) expensive. VMware's Nicira doesn't require that they replace their current network hardware.
Analysts like Cantor Fitzgerald's Brian White wrote in his research note, reports Barron's Teresa Rivas:
"Cisco is crying the blues over emerging markets. We wonder if this is indicative of a broader economic downturn on the horizon, a backlash toward U.S.-based IT vendors in light of the NSA fallout, or Cisco's fault?""
Wedbush Securities' Rohit Chopra downgraded Cisco's rating from Outperform to Neutral and offered this stinging commentary,
Despite a bottom-line EPS beat, fundamentals at Cisco are deteriorating as evidenced by the Q1 revenue miss and a surprisingly weak Q2 guide. Unfortunately, the decline in momentum is due to a combination of macro, execution, competitive and product transition challenges that we think will last for several quarters - with no visibility on improvement. We believe the challenges Cisco faces with SP [service provider] product transitions raise concerns about the company's ability to manage one of the more evolutionary changes in networking with the new SDN switching platform, which is likely to create long pauses over the next several quarters. Given the duration and magnitude of these challenges, we see ongoing risk to the story and think the stock will remain range-bound, unable to outperform the group. We advise investors to move to the sidelines."
Other analysts that have downgraded Cisco include Deutsche Bank's Brian Modoff (Buy to Hold), S&P Capital IQ's James Moorman (Buy to Hold), Wedbush Securities' Rohit Chopra (outperform to neutral).
A host of other analysts did not downgrade the company, but lowered their price targets for the stock.
Cisco is down nearly 12% today to about $21.