Cisco warns, issues bleak forecast

Cisco Systems announced a profit warning for its third quarter as sales of networking equipment to businesses and telecommunications carriers continue to slump.

Cisco Systems announced a profit warning for its third quarter as sales of networking equipment to businesses and telecommunications carriers continue to slump.

Cisco expects third-quarter earnings per share to be in the low single-digit range and for revenue to fall 30 percent from the second quarter.

"The business environment that our segment of the IT industry is facing has never been more challenging," Cisco Chief Executive John Chambers said in a statement. "In fact, this may be the fastest any industry our size has ever decelerated."


Cisco expects fourth-quarter revenue will range from flat to down 10 percent sequentially.

"Everyone expected a miss; everyone expected a charge," said Paul Sagawa, an analyst at Sanford C. Bernstein.

Wall Street analysts previously predicted earnings of 8 cents per share and revenue of $5.95 billion, according to a poll of analysts by First Call.

In regular trading Monday, Cisco's shares closed at $17.20. In after-hours trading, the stock slipped to about $15.30.

Cisco executives said the company expects to take a restructuring charge of $800 million to $1.2 billion as part of a company-wide reorganization that includes previously announced layoffs of about 8,500 employees and the restructuring of certain businesses. The company will take an additional $2.5 billion charge based on excess inventory.

"In an effort to meet our customer expectations, we continued to increase our inventory and capacities to keep up with rising demand. This (additional $2.5 billion) charge reflects the recent significant and unexpected drop in customer demand," Cisco Chief Financial Officer Larry Carter said in a statement.

The layoff of 8,500 employees, or about 18 percent, includes about 2,500 temporary and contract workers, and is expected to save about $1 billion yearly. To further cut costs, the company will consolidate facilities to save $300 million to $500 million.

The magnitude of the warning may turn a few heads, Sagawa said. He roughly equated the charge to something along the lines of 60 cents a share, a huge amount for a single quarter.

Other analysts point out that the general negative mood might not stir up much reaction on the Street. "I think (Cisco's executives) have taken a pessimistic view for the past few weeks, which caused Wall Street to take the same view," said Richard Shannon, an associate analyst at Epoch Partners.

Cisco executives said the economic slowdown that has hit the United States has spread globally. Sales in Asia and Europe were weak in the third quarter, Chambers said.

Long-term, however, Cisco executives still believe the company will reach 30 to 50 percent revenue growth in the future when the economy turns around. Cisco plans to report its final third-quarter results May 8.

"The 30 to 50 percent growth rate is something that might be called into question," said Steve Kamman, an analyst at CIBC World Markets.

"It's the price of success," Kamman said. "Everything Cisco has done to become such a fantastically great company has led to the problems they face now."

Kamman notes that some parts of Cisco's businesses might grow that fast, but that the company as a whole has become too large to sustain the astronomical growth it once displayed, especially since a depressed stock price has dampened its acquisition prowess.

"You've got to give them their due for what they've achieved, but the market is relentlessly forward-looking," said Kamman.

Cisco's third quarter will be the second straight quarter the company will miss earnings estimates. Cisco in February missed second-quarter earnings expectations by one penny because of sluggish sales of networking equipment to telecommunications service providers. The company also saw sales to businesses slacken, particularly in manufacturing.

In a conference call with analysts in February, Chambers warned that sequential revenue growth for the next two quarters will be flat. He also predicted that Cisco's revenue for the current fiscal year would grow 40 percent over last year. But that prediction was based on the assumption that the U.S. economy would recover in the second half of this calendar year and that the economic slowdown wouldn't spread internationally.

In mid-March, Chambers warned sales were not picking up, and the company was seeing early signs of a sales slowdown internationally.

Like others in the technology sector, networking companies have been hit hard in recent months by the economic slowdown. Nortel Networks, Lucent Technologies, 3Com, Sycamore Networks, Extreme Networks, and others have all announced earnings warnings.