The worst of the global economic crisis is over and government stimulus spending on infrastructure is flowing well, says one of the world's largest technology companies.
“We do believe we have seen the bottom of this global recession,” said Robert Lloyd, executive vice president of worldwide operations for Cisco Systems Inc. CSCO-Q “We feel the worst of the economic downturn is behind us.”
The company saw the biggest rise in spending from is government customers, with its public sector unit booking growth “in the single digits” last quarter, he said in an interview. “Stimulus spending is starting to flow through to the intended infrastructure is was destined for.”
Contrary to economists' broad market forecasts for Asia to lead the world out of the trough, Cisco has seen large U.S. businesses boosting their spending first, followed closely by big customers in China. Canada remains something of an anomaly because overall customer spending did not decline.
Cisco had always forecast the U.S. to lead the charge ahead of Asia. Major U.S. companies have begun to re-invest in capital projects, with spending up 10 per cent sequentially in the last quarter. Small and medium businesses there, however, are not loosening the purse strings yet, which is largely the result of them having trouble borrowing money, Mr. Lloyd said.
Spending by telecommunications companies, one of Cisco's largest base of customers, continues to slide, although at a slower rate than earlier quarters, he added.
The expectation has been that phone companies around the world won't start spending again until 2011, but new patterns emerging suggest that may not in fact be the case, said Pierre Ferragu, an analyst with Sanford C. Bernstein Ltd. in London.
“A lot of [capital expenditures] cuts this year were due to weak local currencies and difficult access to credit in emerging markets, two things that have been improving rapidly since June, and operators are getting more and more interested in beefing up their mobile broadband network to capture the opportunity before competition does,” he wrote in a note published Wednesday.
“Could spending in network rebound earlier than expected? We all know operators tend to behave like a herd. If one starts spending, others should follow sooner or later - or risk losing the battle for mobile broadband consumers.”
Mr. Lloyd's remarks echoed positive statements from Cisco's chief executive officer earlier this month, when John Chambers said the recovery has begun.
Cisco used to be a bellwether for the tech sector alone, but as its products have reached further across the economy (three quarters of digital data traffic touches its equipment, by one estimate) and around the globe the company has become more of an indicator for the economy as whole.
Two years ago, Mr. Chambers warned the investing community that Cisco was seeing weakening demand from big U.S. businesses. That was long before most people thought there was anything wrong with the economy, but less than a year before the economic meltdown, led by Lehman Brothers and other one-time economic stalwarts.
In May, a month or so into the stock market rally, Mr. Chambers sang a note of optimism, saying his company had seen some stabilization among corporate customers, even as sales and profit continued to plunge.
With markets warming up their engines again, Cisco has moved into aggressive hunting mode, looking to buy smaller companies to help it offer a new bundle of technology. That package builds on Cisco's traditional network gear and software to include computer servers, storage equipment and virtualization technology that allows organizations to run their IT operations more efficiently and to include new services, such as video conferencing and applications hosted by third parties.
In the last month, Cisco has made acquisition offers worth more than $6-billion (U.S.) for two companies. Tandberg ASA of Norway specializes in video conferencing technology and Starent Networks Corp., of Tewksbury, Mass., makes wireless technology for phone companies.
Mr. Lloyd said a recent $5-billion debt offering by Cisco will be used for share buybacks and acquisitions in the U.S. Although the company has about $35-billion of cash on hand, most of it, about $29-billion, is tied up offshore and cannot be repatriated without large tax payments.
It's logical to assume that the overseas cash will be tapped for foreign acquisitions and the U.S. horde for domestic purchases, Mr. Lloyd said. In this economy, “cash is king,” but Cisco will also be looking at a stock component to future deals.
“We have the flexibility to do practically anything that we want to do that makes sense for our business strategy in both the short and long term,” he said.
