Cisco's Chambers breaks out economic downturn playbook; Eyes cost cuts as demand dries up

Updated: Cisco Systems CEO John Chambers said Wednesday that the company has its economic downturn playbook out and aims to cut $1 billion in costs this fiscal year as demand among customers slows. Chambers said Cisco expects its fiscal second quarter sales to fall 5 percent to 10 percent.

The outlook overshadowed what was a decent quarter for the networking giant. Cisco reported fiscal first quarter earnings of $2.2 billion, or 37 cents a share, on revenue of $10.3 billion. Excluding charges and other items, Cisco reported earnings of $2.5 billion, or 42 cents a share.

Both sets of Cisco earnings (statement, Techmeme) included a tax gain of 3 cents a share. Wall Street was expecting earnings of 34 cents a share on sales of $10.3 billion. Excluding items, Wall Street was expecting 39 cents a share. Add it up and Cisco's results were in line with expectations.

In a statement Wednesday, Chambers said that the company delivered solid results in "what is clearly a very challenging global economy." Chambers repeated his familiar refrain: Cisco will invest into the downturn and come out ahead as amid technological transition periods.

But on a conference call with analysts, Chambers said the company has seen the same economic slowdown that other technology companies have. Slack demand continued through October and Chambers said there hasn't been any improvement. Why is that notable? Cisco is the first technology company to note that demand has been weak through October. Other companies said demand was weak at the end of September and early October. Cisco indicated that conditions aren't improving.

Chambers added that economic challenges in the U.S. have spread through Europe and Asia. Nevertheless, Chambers said Cisco is comfortable with long-term goal of delivering revenue growth of 12 percent to 17 percent. It's unclear when the smoke will clear for Cisco, however.

In the meantime, Chambers said that Cisco has its "economic downturn playbook" out. In general, the playbook is to be proactive and recognize the downturn, adjust accordingly, invest in the future and solidify customer relationships. Chambers  said Cisco will continue to focus and realign resources--another $500 million--toward Web 2.0 technologies, but the company will cut more $1 billion from its expense by the end of its fiscal year. He added that Cisco will cut expenses while investing in emerging technologies and emerging markets. Cisco has also implemented a hiring freeze, reduced travel expenses and events, scrutinized discretionary costs and pared back certain capital expenditures.

Cisco said its customers are paring back projects and product order growth was slipping. Book to bill was below 1. Now it's a game of aligning its cost structure with what Cisco sees as a big slowdown in demand.

Chambers also said that he wasn't certain about Cisco's guidance and added that his uncertainty is the second worst in his career. The first was the dot-com bust.

Needless to say the market didn't take this outlook well:

Other items:

• Enterprise revenue growth was down 11 percent and Cisco's service provider and public sector order growth were flat.
• CFO Frank Calderoni said Cisco is seeing more inquiries from customers about its financing business. He added that Cisco is maintaining its lending discipline and has a $4.4 billion liability reserve. His point: Cisco Capital has an investment grade portfolio that has navigating the credit crunch.
• Research and development spending in the first quarter was $1.4 billion, up from $1.23 billion a year ago.
• Days sales outstanding at the end of the first quarter was 29 days, down from 34 days at the end of the fourth quarter. Inventory turns were flat at 11.9.
• Cisco's cash and equivalents was $26.8 billion in the first quarter, up from $26.2 billion at the end of the fourth quarter.