Cisco's Inventory Woes Mount
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Cisco Systems Inc. (Nasdaq: CSCO - message board) executives cited
plummeting demand for its products as it announced today that its financials
would continue to get worse before they get better (see Cisco Projects Revenue
Dip ). The company still expects to show a profit for its third fiscal quarter of
2001, but it now expects pro-forma earnings to be “in the very low, single-digit
range.”
Analysts previously thought Cisco’s earnings for fiscal Q3 would be around 11
cents a share. The company’s year-ago quarterly earnings were 14 cents a
share.
The networking giant said revenues for Q3 would be about $4.69 billion, down
about 30 percent sequentially from its Q2 revenues of $6.7 billion. For its fourth
fiscal quarter, Cisco executives timidly offered that revenues would be in the
range of $4.22 billion to $4.69 billion, or flat to down 10 percent when compared
with Q3.
CEO John Chambers added, “It would not be a big surprise to see our growth on
either side of this range.” In other words, things could be better, or worse. The
final numbers for Q3 will be announced on May 8.
Cisco also verified today that it is cutting 8,500 jobs overall, including 2,500
temporary and contract workers. In March Cisco estimated its total job cuts to be
between 2,500 to 3,000 temporary and contract workers and 3,000 to 5,000
regular employees (see Cisco Slashes Jobs, Costs ).
During the quarter, Cisco will take a $300 million to $400 million charge related to
job cuts, but ultimately it expects the cuts will save the company about $1 billion
a year.
Cisco also said that it would take a charge against earnings of about $2.5 billion
due to excess inventory. Even worse, Cisco CFO Larry Carter told analysts that
they “should not make an assumption that [the inventory charges] are [only]
related to discontinued products.” In other words, Cisco is hinting that there may
be more bad news in this vein as it probably hasn’t finished assessing how the
cancellation of its wavelength router product will affect its inventory (see Cisco
Kills Monterey Router ).
How did Cisco end up with so much unsold stuff? CEO John Chambers explained
to analysts today that, back when there was a components shortage, Cisco put
certain purchase agreements in place to make sure it was one of the most
reliable systems vendors. Of course, when the economy drove Cisco's business
off the cliff, the company was stuck with materials it didn't need.
About 70 percent of Cisco’s excess inventory charge relates to its service
provider business, and 80 percent of the total charge is comprised of raw
materials for components, Carter says.
Analysts questioned Chambers repeatedly about whether this inventory buildup
would lead to a price war in the systems space, but Chambers shook off every
hint that Cisco would win by undercutting its competitors. “I don’t really see price
being the primary decision point, even in today’s environment,” Chambers says.
“What we are experiencing is a single quarterly decrease of approximately 30
percent,” Chambers says. “We never build [financial] models to anticipate
something of this magnitude.”
-- Phil Harvey, Senior Editor, Light Reading lightreading.com |
