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

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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

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23 comments

  1. Fiver

    These are impressive numbers. Doubly so if maintained. I can’t but wonder if it’s evidence of the first major rift to open up since the entire globalization process began. After all, it’s not just Snowden and spying – though he’s done a fabulous job of getting that critical info out – it’s the whole relationship with a very significant list of countries. One would think this accounts for the Obama fast-track request – but isn’t pursuing this aggressively now simply going to drive BRICS and other growing economies increasingly to seek alternatives? Important story to follow.

    1. PaulArt

      Methinks this is a very seminal event in the beginning of the death of the American Corporation of the 21st century. These hugely bloated time servers that function as piggy banks for corrupt, lazy and entitled CEOs who are now part and parcel of the elitist marionette structure of American Oligarchs. I watched Thom Hartman talk about his book ‘The Crash of 2016′ on Democracy Now yesterday and it was pretty frightening. In the 1920s it was the Morgans and the Rockefellers but today it is the CEOs and the Hedgies and the numerous other swindlers operating in the shadows who are taking America down to the sewer and the first domino to fall is the American Corporation in the field of hi-tech. This is sure to be extended to other industries like Agri business, pharma and even software services. There is already strong distaste among the farmer community in India for companies like Monsanto. American pharma is also becoming unpopular for their relentless pushing of decrepit and bogus patent claims against generic drug manufacturers. I think Americans are on a learning curve called ‘greed can only be taken to a certain limit’. The backlash that will come one hopes will not be in the form of a WWIII. You cannot put anything past people like Adelson, the Kochsuckers or the Wall Street parasites and Defense Contractor douche bags who now have multiplied like cockroaches and hijacked Democracy.

      1. Banger

        I think we may be entering a situation where the oligarchs who managed to literally conquer the world may, at the peak of their power, fall very fast. I see evidence on many fronts that the tissue of lies that has kept these people in power is falling apart. We’ll see how the propaganda organs manage to try to keep it together but I’m not sure people are as open to their consistent diet of lies.

        1. NotTimothyGeithner

          I agree with this. It will be very much like the end the French and British colonial systems which largely functioned on deals with local control. When the Nehru in India decided it was time to tell the British to leave, they left instead of deciding to argue with his 4 million men under arms.

          Non-American brand companies will play the role of the USSR and the U.S.A. in the break up.

          Much like Obama removing most of the troops in Iraq. The puppet-Iraqi government no longer saw a reason to provide support for U.S. troop operations and told us to leave, knowing the U.S. could no longer operate without their aid.

          Or does anyone remember the Boston lockdown? Without the efforts of Dunkin Donuts, that might have lasted half a day.

      2. smartstrike

        ‘Defense Contractor douche bags who now have multiplied like cockroaches and hijacked Democracy.’

        When they write history of the US 50-years from now, your quote will be cited to explain what happened to America in the 21st century.

        1. Lambert Strether

          Tape worms would be a better metaphor than cockroaches, I think. Captures the rentier, extractive mentality much more precisely. Also, you don’t necessarily know the tapeworm is there, unlike cockroaches. At least not in the beginning, I mean. The alien stomach-burst is another fine metaphor.

    2. fajensen

      It does not all have to be due to the NSA. Maybe CISCO, IBM, e.t.c. were hiding general poor performance with the usual accounting tricks (booking goods stored with dealers as “sales”, booking invoices as capital e.t.c.) and now the NSA-scandal is the opportunity to unwind the scams, take the loss and blame it on “external factors beyond our control” or “Obama”.

      It would be nice if it was because of the NSA and the world getting fed up with the USA, but, I am not so sure.

  2. OverHere

    Could the hightech companies sue Mr Snowden and win so the FED may pay them some $ugarmoney because Snowden is unable to pay and he worked for the US gov. ?

    Just wonder who will pay for the loses …

  3. beerdigando

    Your first link (in the “cross-posetd from TTP” heading) isn’t what you intended, I think. You want http://www.testosteronepit.com/home/2013/11/14/nsa-spying-crushes-us-tech-companies-in-emerging-markets-an.html , no?

    But thanks for posting, my initial reaction to the NSA thing was that it must have severe blowback on trust in US business. Who would want to stay on a Microsoft platform using Google and so on if they have sensitive data? I reccommend http://www.prism-break.org

  4. LucyLulu

    It was a foregone conclusion that the NSA revelations would kill the US tech industry’s overseas business. If you owned a foreign business, would you use US hardware/software or store your proprietary data on US servers?

    It really sucks for the companies who weren’t part of the loop.

    1. NotTimothyGeithner

      Not really. The companies who weren’t part of the NSA game made do without cash infusions from the NSA/CIA, so at least from their perspective, the “clean” companies can at least advertise they were clean and don’t have to compete with companies receiving massive government subsidies.

      If they survived against government subsidized companies, it means they produce better merchandise or are better run with the potential to produce better goods/services. Of course, companies piggy backing on the NSA companies’ successes would suffer, but then again, they are like the small tobacco farmers, perhaps not as hideous. Those companies serve as an innocent “victim” of mean reformers for lobbying purposes, so I’m not going to fall into the trap of worrying about innocent “victims.”

    2. kievite

      >If you owned a foreign business, would you use US hardware/software
      > or store your proprietary data on US servers?

      The answer is yes and yes. Don’t be fooled by rhetoric.
      Companies will make some changes but in no way that means boycott of US hardware or cloud services.

      In many countries the US cloud services are “lesser evil ” in comparison with domestic.

      While this quarter is dismal, whether this backlash is temporary or not remains to be seen.

      Please don’t jump to conclusions. BTW CISCO business is under tremendous pressure from price standpoint: they charge Cadillac prices for their hardware. In no way this is sustainable and other companies will eventually eat CISCO lunch just based on that. May be NSA revelations served just as a catalyst. What was “politically correct” to buy no longer is and alternatives that were blocked on the basis “Nobody was ever fired for buying CISCO” are now unblocked.

      So please don’t engage in too much wishful thinking here. BTW CISCO equipment (as well as other US manufacturers) is produced in China ;-)

      1. NotTimothyGeithner

        This has risen to government contracts. The Social Democrats in Germany can’t win in Germany despite support for their positions because when they formed the last coalition they promised no more than a 2% increase for a sales tax. They participated in passing a 3% increase. Politicians who sign deals with Americans companies going forward will find they might lose 5-10% of their vote total. This is the difference between winning and losing. Going with a non-American company will preserve their base. Of course, politicians need for campaigns but only so much which is the real secret. They need a good start up fund, but after that, the media and the quality of candidates take care of the rest. In the end, money offered by American companies will never be as worthwhile as money offered by non-American companies.

        Government contracts set the standard. Small companies adopt the government system inevitably, and consumers will switch when given a choice between the U.S. government and a private enterprise. This might be a five year process, but it will be linked to widespread anti-Americanism which American companies have often avoided.

    3. diptherio

      My question is this: Under the TPP, would these companies be able to sue the U.S. gov’t for loss of expected profits due to gov’t action? Wouldn’t that be a hoot!

      This is definitely one of them PPP moments: Pass Popcorn, Please…

  5. JCC

    I’d love to believe that these big drops in sales were all because of “it that can not be named” but until I see numbers from the competition that show an increase of 30%, 40%, or 50% in revenues I will have my doubts.

    It’s a lovely thought, but still speculation.

    If we get the opposing numbers that reflect these drops maybe things will change for the better on this front, since we know that all the U.S. ultimately cares about is profit/money.

    1. kievite

      JCC,
      > I see numbers from the competition that show an increase of 30%, 40%, or 50% in revenues I will have my doubts.

      Exactly.

      I think other factors are in play too. At best “it that can not be named” was a catalist for a pre-existing trend.

      IMHO all this talk about CISCO and other US hardware manifactures demise (or signigicant loss of market share) might be just a wishful thinking.

      The USA technical lead does exists and will not disapper tomorrow.

      Companies like Huawei are making progress but still have a long, bumpy road ahead. Both in quality of products and reliability.

      And a lot of companies will buy CISCO simply because it is proven, reliable bland. Even at Cadillac prices they charge. Especially financial sector.

      BTW, I think Dell has higher chance to pick up some of CISCO business then Huawei.

  6. washunate

    At a fundamental level, we know that secrecy and authoritarianism and concentration of wealth and power are antithetical to market-based economics.

    It gets tricky, though, trying to distinguish that general assault on individual rights from the particular emergence of competitors and substitutes to Cisco’s business in a given quarter’s activity.

    If this is a major indication of the trend away from entrenched businesses, that would be a great sign! Diversity is a strength, not a weakness. The multipolar world cannot arrive soon enough, both for Americans and for the rest of the world.

  7. Pearl

    I was wondering if anyone had any thoughts on the following.

    A 424(b)(5) was recently filed with the SEC for an interesting and extremely large Commercial Real Estate Trust:

    http://www.secinfo.com/d1evd6.xTk.htm#1stPage

    The filer is the Deutsche Mortgage & Asset Receiving Corp., and the actual Trust is referred to as the COMM 2013-CCRE11 Mortgage Trust.

    The Trust is stuffed with a lot of (obviously) commercial real estate. (Almost all properties are within a few miles of small regional airports–is that a “thing?) Anyway, the one property that caught my attention was the ONE WILSHIRE BUILDING in downtown Los Angeles. (My dad worked as a computer systems analyst for Southern California Edison at ONE WILSHIRE when I was a little girl in the late 1960′s, so I spent quite a few Saturday mornings there among the humongous computers that were housed there.)

    Here are the images of the building included in the SEC filing:

    http://www.secinfo.com/DB/SEC/2013-000/1539/497-0009/06-019.jpg

    And here is a map of its tenants that was included in the SEC filing:

    http://www.secinfo.com/DB/SEC/2013-000/1539/497-0009/06-020.jpg

    I found this L.A. Times article about the sale, and thought it was odd how the NSA was so off-handedly mentioned in the article.

    http://articles.latimes.com/2013/jul/18/business/la-fi-0718-property-report-20130718

    Anyway. The ONE WILSHIRE BUILDING is apparently quite the telecommunications hub these days. So–I guess it would make sense that all of the major players have a presence in that space now, and it might be easy to determine who the major players are by noting who the current tenants of ONE WILSHIRE are, as noted in the floor plan attached to the SEC filing.

    Also, ONE WILSHIRE is specifically mentioned almost 200 times in the 424(b)(5). So it’s obviously an important property as far as the Trust is concerned. (Apparently, making up over 6% of the Trust.)

    Perhaps German Chancellor Angela Merkel was not so surprised about having been spied upon, after all. ;-)

    http://www.nbc.com/saturday-night-live/video/weekend-update-angela-merkel/n42648/

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