Cisco: Shivering China Comments And Tech Implications

Cisco (Nasdaq: CSCO) reported earnings last night. They had some comment about China, but, ah, who cares, it's less than 3% of their business. But it was down huge and caused them to miss on guidance. Imagine companies with larger exposure to China potentially getting hit by the same new wrinkle in this trade war? Oh my!

Let's Jump Right To It

Here are some of the comments Cisco made about China yesterday on their earnings call:

"The enterprise business was really, we saw weakness in China, which was contributed to it."

Not so bad right? But China is 3% of the company's overall revenues while Enterprise is their largest segment. China was the reason for their largest segment to slow from +9% last quarter to -2% this just reported quarter.

Strange, right?

That's a massive slowdown from a China business that's minuscule compared to the overall pie, wouldn't you agree?

So what's up?

Listen to what the CEO said about it,

"Yes. Let me just comment on the China situation. I mean you're right it's down below 3 (as a percent of the overall company), it's a small part of our business, but obviously when it falls very dramatically it can still have some impact because it is greater than zero. But long term it's not a concern that I worry about much at this point. And so, that's really the extent of what we saw there. I mean the China reduction contributed to a point of the issue in all of enterprise for us. So, it was that significant and we definitely saw significant impact on our business in China as it relates to what's going over the trade war right now."

Now listen to what the CEO said about the reason why it's down so big and this is the scary part. Please let me know if this has any implications for tech at all, oh my,

"And then, what we've seen is in the state-owned enterprises anymore, we're just being we're being uninvited to bid. We're not being allowed to even participate anymore. So those are the enterprises that's where the large impact was this past quarter, so it was just a much faster decline of what we candidly expected."

Anybody notice that?

Cisco is a US company. The US and China are in a trade war. Cisco has a surprise guide-down based on a sub-3% part of their business because...

"We're being uninvited to bid. We're not being allowed to even participate anymore".

Tell me that's not a big fat oh my.

China is uninviting a major US tech company to bid on new deals, sorry.

Tell me that's not potentially the next (so far unreported) jab in this trade war.

China Is Not Allowing Cisco To Participate Anymore

What Tech Stocks Are Next?

Let's take a stroll down logic lane for a second.

If Cisco's overall results were hit by China which was less than 3% of their overall business, what's going to happen to the rest of tech with 10%-50% of their business in China.

Most tech giants with China exposure already reported. Cisco reports later in earnings season after everybody reported. Cisco is guiding for next quarter.

They may be late out of last quarter's earnings season or are they an early read on next earnings season?

If this is some sort of early brewing change for tech in China, lookout. If this is China's next jab in the trade war, what's that going to mean for Q3 earnings season? Not good.

Have you thought about it yet?

I can keep writing but I don't know how better to express it. Tech's in trouble if any other companies are "not invited to bid."

Conclusion

Oh my, tech's in trouble. If China's measly-sized 3% hit the stock 9% today (so far) what will happen in Q3 when other China exposed tech companies report "we're no longer being invited to bid."

Not good.