Cisco posts $2.69 billion loss after charges
By Ben Klayman
CHICAGO, May 8 (Reuters) - New Economy powerhouse Cisco Systems Inc. (NasdaqNM:CSCO - news) on Tuesday posted its first-ever net loss after charges of $2.69 billion and said its quarterly operating profits fell drastically as it grappled with the slowing global economy and a spending slump on telecommunication equipment.
At the same time, Cisco's Chief Executive John Chambers suggested there might be at least a gleam of light at the end of a long, dark tunnel: A few promising signs that the communications and networking sectors could hit bottom in the next one to two quarters and perhaps resume growth in 2002.
Even so, the outlook for future demand remains murky, the company said, particularly in the service provider market, which includes cable and telephone companies. On top of that, European sales have dropped sharply and it appeared Cisco was still trying to discern what products were weak in different areas of Europe. North American sales were no better off.
``With what's going on domestically, where North America is ???ral, and with Europe turning over, I think it'd be very tough to say that, overall, the business is turning around in one to two quarters,'' said Justin McNichols, portfolio manager with San Francisco-based Osborne Partners Capital Management, which oversees about $600 million.
``I honestly think they (Cisco executives) can't get their arms around how bad the United States will be and how far (the weakness in) Europe will spread and to what areas,'' he said.
SLOWDOWN HITS CISCO HARD
The net loss came after charges of $2.2 billion for writing down excess inventory and $1.17 billion for a restructuring that includes 8,500 job cuts, or 17 percent of its work force, which were confirmed last month, slightly more than the 8,000 Cisco initially expected to cut when it first announced the job reductions in March.
Including the one-time items, the San Jose, California-based maker of computer-networking gear reported a fiscal third-quarter net loss of $2.69 billion, or 37 cents a share, compared with net income $641 million, or 8 cents a share, a year earlier.
Although in the past Cisco had repeatedly topped analyst expectations by precisely one penny, the precipitous slowdown in high-tech spending hit the company hard. The 30 percent drop in sales from its second quarter, for example, was so drastic Cisco hadn't even considered it possible, Chambers has said. Cisco's competitors, including Lucent Technologies Inc. (NYSE:LU - news) and Nortel Networks Corp., (NYSE:NT - news)are also laying off thousands.
Fortunes changed quickly for all concerned: Cisco went from year-over-year orders growth of 70 percent in November to a decline of 30 percent within a span of several months, Chambers noted.
Cisco said its profits before one-time items dropped 77 percent to $230 million, or 3 cents a share, for the quarter ended April 28, compared with pro forma net income of $1 billion, or 13 cents a share, in the year-ago period. Revenues for the quarter fell 4 percent to $4.73 billion from $4.93 billion last year.
``This may be the fastest deceleration any company of our size has ever experienced,'' Chambers said in a statement. ``We believe that the challenges we face are primarily based on macro-economic and capital spending issues, although there is always room for improvement in our own operations.''
After an April earnings warning, analysts had cut their expectations for Cisco to 2 cents a share, with a range of nil to 4 cents, according to Thomson Financial/First Call. Before the warning, analysts had expected a gain of 8 cents.
In after-hours trading, Cisco's stock dropped 73 cents, or 3.4 percent, to $19.65 from its close of $20.38 on Nasdaq trading, where it had gained $1.13, or nearly 6 percent. Over the past year, it has underperformed the Standard & Poor's 500 index by about 64 percent.
FOURTH-QUARTER SALES FORECAST REITERATED
Cisco's $2.2 billion write-down for excess inventory was less than its earlier estimate of $2.5 billion, Chief Financial Officer Larry Carter said, adding that the less-than-expected charge was due to the conservative nature of its initial forecast, issued in April.
Cisco said on April 16 its third-quart???re one-time items would be in the ``very low'' single-digit range and that sales would fall 30 percen Fo???n the second quarter. It also said last month that fourth-quarter sales would be flat to down 10 percent sequentially, which it again reiterat? Du Du %? DE?as a public company.
But Chambers said on Tuesday there were signs that spending on telecommunications equipment could soon hit bottom.
``We do see a number of positive indications that could result in a bottom in our industry in the next one to two quarters,'' Chambers said on the conference call. ``We underestimated how quickly the valley would occur and the depth of the valley.''
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