Cisco Q3 profit will miss estimates

Duncan Martell

SAN FRANCISCO: Cisco Systems Inc., the No.1 networking giant, said on Monday that its third quarter pro forma earnings will miss analyst forecasts by a wide margin and announced its plans to lay off a total of 8,500 workers, in line with its earlier estimate of job force reductions.

Cisco, saying that the current business environment "has never been more challenging," said that it now sees fiscal third-quarter pro forma per-share earnings in the ‘very low’ single-digit range and that sales will plummet to 30 per cent from second-quarter levels. Thomson Financial/First Call pegged Cisco's second-quarter per-share profit at 8 cents.

Cisco's news, bodes ill not just for the networking giant, but more importantly, analysts said, for the networking and communications industries at large. Weakness in demand has now clearly spread to the Asia-Pacific region and Europe, Cisco said, adding that it has never seen business slow so quickly and so significantly.

"My real concern is not about Cisco," said analyst Tom Lauria of ING Barings. "Relatively speaking, the company will do well, but if relatively well is having revenue difficulties to this order of magnitude, then I think it is troubling for the industry." Lucent Technologies Inc., Nortel Networks Corp. and Cisco's other rivals have all either announced large job cuts or issued profit and sales warnings. Even some of Cisco's smaller, more nimble competitors, have seen business slow as well.

The San Jose, Calif.-based computer-networking concern also said it plans to take a restructuring charge associated with the layoffs of $800 million to $1.2 billion as well as a charge for excess inventory of about $2.5 billion. Gross margin - or the percentage of sales remaining after subtracting product costs - will be in the low-to mid-50 per cent range.

"This may be the fastest any industry our size has ever decelerated, which has required us to make difficult business decisions at an unprecedented speed," said Cisco chief executive John Chambers in a statement.

The work force reduction amounts to about 8,500 people, a group composed of about 2,500 temporary and contract workers. The company said it expects the actions will cut costs by about $1 billion annually and that initial savings will materialize during the fiscal fourth quarter of 2001, which ends in July. "I think market conditions are a lot weaker than we expected and even though we had revenue and earnings estimates that were lower than consensus, the pre-announcement is still disappointing. A further slump is not ruled out," said analyst Ken Leon of ABN Amro.

(C) Reuters Limited 2001.