CSCO ( $20 unchanged)Posts $2.69 Billion Loss After Charges
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By Ben Klayman
CHICAGO (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 the networking and communications 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, and business also has slowed in much of Asia. North American sales were no better off.
``With what's going on domestically, where North America is just poor in general, and with Europe turning over, I think it would 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 added.
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.
Chambers said no further job cuts are planned after the company finishes cutting to 38,500 people by the end of the fourth quarter. The cuts will save the company $1 billion on an annual basis, starting in the fourth quarter.
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 still believes long-term growth will return to the 30-percent to 50-percent range.
The slowdown's impact isn't hitting Cisco alone. Its competitors, including Lucent Technologies Inc. (NYSE:LU - news) and Nortel Networks Corp., (NYSE:NT - news) are also laying off thousands.
Fortunes changed quickly. 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.
The company said its gross profit margin shrank in the third quarter because of unfavorable product mix, lower shipment volumes and higher price discounting. It will likely slip further in the fourth quarter before rebounding.
Cisco also has come under competitive fire as Juniper Networks Inc. (NasdaqNM:JNPR - news) took market share from Cisco in the third quarter, Chambers said.
``If you were to say, 'John out of all the competitors that you watch, who do you watch closest at this time,' Juniper would be the answer,'' he told Reuters.
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. ``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.''
Nevertheless, Cisco ended the quarter with more than $17 billion in cash, putting it in good position, Chamber said, to weather the slowdown and make acquisitions, something it hasn't done this year.
``Cash is king during an economic slowdown,'' he told Reuters. ``The industry is going to consolidate and we clearly have a strong track record of being able to consolidate.''
``Contrary to what you read, we can acquire now easier than ever before,'' Chamber added.
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 the lower number was due to the conservative nature of its initial April forecast.
Cisco said on April 16 its third-quarter earnings before one-time items would be in the ``very low'' single-digit range and that sales would fall 30 percent from $6.75 billion in the second quarter. It also said last month fourth-quarter sales would be flat to down 10 percent sequentially, which it again reiterated on Tuesday's conference call.
The warning marked Cisco's largest-ever earnings miss and the first time sales have declined from one quarter to the next immediate quarter as a public company.
But Chambers said on Tuesday there were signs 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.''
(Additional reporting by Duncan Martel in San Francisco) |
