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Cisco's China revenue drops 25% and outlook dims amid trade war

Share price falls as US company says main products soon to be hit by tariffs

Cisco says it is no longer allowed to bid on some contracts from Chinese state-owned enterprises.   © Reuters

PALO ALTO, U.S. -- Network equipment maker Cisco Systems said on Wednesday its China revenue fell 25% in the past quarter due to the ongoing trade war and provided weaker guidance for the next quarter as the U.S. company expects its main products to be hit by tariffs soon.

"We definitely saw a significant impact on our business in China as it relates to the trade war right now," said Cisco CEO Chuck Robbins on the Wednesday earnings call, adding that when it comes to some enterprise contracts in China "we're being uninvited to bid. We are not being allowed to even participate anymore. It was a much faster decline than what we candidly expected."

Cisco's China revenue dropped by a quarter on an annualized basis in the three months through July 27, Kelly Kramer, the company's chief financial officer, said in the earnings call.

However, management said the company's China business now accounts for less than 3% of the total revenue and is not a concern in the long term.

"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," Robbins said. "It's not a concern that I worry about much at this point."

The majority of Cisco's revenue comes from sales of data center networking products, including switches and routers, which are among the items on a list of products subject to an additional 10% tariff that the Trump administration announced earlier this year.

Washington this week delayed imposing that tariff on some Chinese-made goods until December, but Cisco said most of its products are not on the list of temporary exemptions and will soon to be hit by the tariff, which will further drag down its profit margin and next quarter's earnings.

The company is now forecasting flat to 2% revenue growth in the next quarter, which is weaker than analysts' consensus forecast of 2.5% for that period.

Due to the sharp decline in China business, overall product orders in the Asia-Pacific region decreased 8% year over year in the past quarter, in comparison to 4% growth in Europe and a 1% increase in the Americas.

The company shares dropped nearly 8% in after-hours trading.

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