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UPDATE 5-Cisco outlook misses expectations; cuts jobs
February 5, 2009 / 1:14 AM / in 9 years

UPDATE 5-Cisco outlook misses expectations; cuts jobs

* Sees Q3 rev down 15-20 pct, below expectations

* To cut 1,500-2,000 jobs but no plans for mass layoffs

* Fiscal Q2 revenue $9.1 bln, market expected $9.0 bln

* Q2 EPS ex-items $0.32, beats market’s view of $0.30

* Shares down over 4 pct on Q3 outlook (Adds analyst comments, updates share price)

By Ritsuko Ando

NEW YORK, Feb 4 (Reuters) - Cisco Systems Inc (CSCO.O) Chief Executive John Chambers forecast revenue will drop far more sharply in the current quarter than Wall Street expected, and said the network equipment maker is cutting up to 2,000 jobs.

The forecast on Wednesday pushed Cisco shares down 4 percent in after-hours trade as investors feared the world’s biggest maker of routers and switches may be facing a 2001-style freeze in technology spending.

Cisco’s warning also dragged down Nasdaq and Standard & Poor’s 500 index futures, suggesting some turbulence could hit the tech sector on Thursday.

“The environment is very challenging and there are several regions of the world that are still deteriorating. Before things get better the situation needs to stabilize, and we’re not there yet,” said Mark Sue, an analyst at RBC.

Chambers told analysts on a conference call that he expects revenue in the current, fiscal third quarter to fall 15 percent to 20 percent from a year ago -- much worse than the average analyst forecast for a 10.5 percent fall to $8.8 billion.

He said economic weakness had spread beyond the United States and Europe.

“Being very candid, no one, including us, knows how long it will last,” he said.

Chambers said a majority of Cisco’s customers seemed to expect a recovery in 2010, and that a smaller group expects an upturn in 2009. Ever the cheerleader of Silicon Valley, the 59-year-old Chambers said he was slightly more optimistic than his customers, although he added that it was one of the most difficult times in his career to give an outlook.

2001 ALL OVER AGAIN?

Cisco is one of the first tech companies to report results that include most of January, making it an early indicator of trends in technology spending.

Cisco said product orders in January fell 20 percent from a year earlier, accelerating from a 11 percent decline in December and indicating global technology spending was off to a weaker-than-expected start in 2009.

That has raised fears of a major layoff at Cisco -- a move Chambers has said he wants to avoid after a painful and massive cutback when the tech bubble burst in 2001. While phone service providers and large corporations are not as over-invested in network equipment as they were then, the latest macroeconomic slowdown has been more drastic, he noted.

Customers like U.S. phone companies AT&T Inc (T.N) and Verizon Communications Inc (VZ.N) have said they are trimming capital spending in 2009, even amid growing use of the Internet.

Tighter credit and a hazy economic outlook has also made it harder for Cisco’s corporate customers to invest in big-ticket technology items. A Cisco CRS-1, for example, costs around $500,000 to $1 million.

JOB CUTS

Chambers said Cisco, which ended the quarter with 67,318 employees, would continue to cut costs, leading to a loss of 1,500 to 2,000 jobs in the near term.

He did not rule out the possibility of a major layoff, which he defined as a cut of 10 percent or more workers.

“If business continues to change dramatically, we would obviously do what is necessary to bring our expense structure in line with revenues,” he said. “If that is the case, layoffs could be necessary as they have been one time in the past.”

His cautious outlook overshadowed firmer-than-expected results for the fiscal second quarter.

Quarterly net profit fell to $1.5 billion, or 26 cents per share, from $2.1 billion, or 33 cents a share. Profit excluding items fell to 32 cents a share from 38 cents, exceeding the market’s average forecast of 30 cents a share according to Reuters Estimates.

Revenue fell 7.5 percent to $9.1 billion, the first year-on-year decline since 2003, although it was slightly above most analyst estimates. In November, Cisco forecast a 5 to 10 percent year-on-year decline.

Chambers said that assuming the economy returned to a normal growth rate, Cisco was keeping its long-term target for annual revenue growth of 12 percent to 17 percent -- a rate some analysts say may be impossible in the next few years.

Cisco shares fell 4.4 percent to $15.14 in extended trade after closing at $15.84 in regular Nasdaq trade. Before the quarterly outlook, its shares had risen nearly 2 percent on the stronger-than-expected results. (Additional reporting by Sinead Carew and Robert MacMillan; editing by Richard Chang and Tiffany Wu) (ritsuko.ando@thomsonreuters.com; +1 646 223 6084; Reuters Messaging: ritsuko.ando.reuters.com@reuters.net)

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