Cisco to cut 11% of workforce, warns slowdown could spread

Eric Lai and Duncan Martell

SAN FRANCISCO: Cisco Systems Inc., the No. 1 maker of networking equipment

for the Internet, said on Friday it would cut its full-time workforce by as much

as 11 per cent during the rest of its fiscal year as evidence mounts that the US

economic slowdown is spreading and could run longer than anticipated.

Cisco joins a growing cadre of high-tech firms that are cutting expenses,

including chip maker Intel Corp., which said it would cut close to 6 per cent,

or 5,000 positions, of its work force, mostly through attrition.

Cisco said it would cut between 3,000 to 5,000 regular jobs, a number

equivalent to between 7-11 per cent of its global employee base of 44,000. The

disclosure by Cisco follows a Reuters report late Thursday night that the San

Jose, Calif.-based company would be making cuts.

As a result, the company said it would take a one-time charge of between $300

million and $400 million by the end of its July fiscal fourth quarter 2001.

After hitting a low of $20-5/16 before the announcement, Cisco closed down

$2-3/16 at $20-5/8 on Nasdaq on volume of more than 151 million shares, more

than triple its average daily activity. Its shares fell to $20-1/8 in

after-hours trading on Instinet.

The job cuts would be the largest so far at Cisco, Cisco chief executive John

Chambers said in an interview, adding that based on his conversations with chief

executives of large customers in different industries, any pick-up in demand and

capital spending could be far off.

"You're starting to see early issues with certain countries and US

multinationals doing business on a global basis," Chambers said in the

interview. "Particularly here in the US, the majority of them would say

we're in for some tough times."

Signs of trouble



While Cisco had steadfastly maintained in recent months that it did not plan any
job cuts, there were signs of trouble. Chambers had said more than once in

public that the current economy was "very, very challenging" for

Cisco.

Cisco also missed analysts' earning expectations for the first time in more

than six years when it reported fiscal second-quarter results on Feb. 6. Even

though the company missed forecasts, second-quarter profit still surged 48 per

cent and sales rose 55 per cent, both from the year-ago period.

Cisco also said it would lay off most of its contract workers, cutting from

2,500 to 3,000 jobs from a current base of about 4,000 temporary workers.

Cisco did not indicate how much money it expected to save from the layoffs

and budget cuts, which include cutting travel costs by 60 per cent.

Gerard Klauer Mattison analyst Michael Cristinziano told Reuters before the

Cisco announcement that he thought large-scale layoffs were unnecessary.

"To cut people would be counter-productive and doesn't do any good for

morale," he said.

Like many high-tech companies during the extended Nasdaq bull run, Cisco had

been on an growth spurt, adding around 23,000 employees over the last year and a

half.

Continued...

Now, along with other makers of telecommunications and networking equipment,

Cisco is being hurt as phone companies and big corporations slash their capital

expenditure and technology budgets.

Others slashing jobs include Nortel Networks Corp., the world's No. 1

supplier of fiber-optic systems equipment, which is cutting 10,000 jobs, or 12

per cent of its workforce, and rival Lucent Technologies Inc., which is cutting

11,000 employees by the year end.

JDS Uniphase Corp., the world's largest supplier of fiber-optic components

used by telecommunications equipment makers like Cisco and Nortel, is also

cutting 3,000 workers, or 10 per cent, of its staff. Networking equipment maker

3Com Corp. is also cutting 1,200 jobs, or about 10 per cent of its full-time and

contract staff.

Paul Johnson, a Robertson Stephens analyst, said he believes Cisco will still

earn 12 cents a share in the third quarter and 45-50 cents for the year.

He said he believed the layoffs are a necessary wake-up call to let Cisco

employees know that the company is serious about trimming costs and making sure

it is well-positioned when demand rebounds, whenever that may be.

"Short of measures like these, it doesn't sink in," Johnson

said."

Demand tough to forecast



Forecasting demand is proving to be tough, as well.

"Our visibility is very limited," Chambers said. "There's

better than a 50-50 chance that it's going to be more than a six-month

phenomenon."

"Given the uncertainties in the industry, given the fact that many of

our counterparts have dramatically reduced their estimates and given the fact we

are beginning to see the economic challenges evolve on a global basis in talking

to other CEOs, we would expect a very wide range of estimates," Chambers

said.

For years, Cisco's careful management has resulted in analysts' estimate

ranges that were in a tight band, often ranging little more than a few pennies

apart.

Cisco was expected to earn 64 cents per share for fiscal year 2001, according

to an average of analysts surveyed by First Call/Thomson Financial. It was

expected to earn 79 cents for fiscal year 2002.

(C) Reuters Limited 2001.