Cisco slashes Q3 estimates, takes $3.7 billion charge

By Jim Duffy, Network World |  Business

Cisco Systems has drastically reduced revenue forecasts and will take a huge charge against earnings for its fiscal third quarter, due to the prolonged slump in the industry and overall economy.

Cisco expects revenue for its fiscal third quarter to be down approximately 30% sequentially from revenue in the fiscal second quarter, which was $6.7 billion. This is a dramatic downturn from the guidance Cisco provided in February, when it expected third-quarter revenue to be flat to down 5%. Analysts had subsequently reduced their estimates to $6.1 billion for the third quarter.

The company expects to be profitable for the third quarter, but with pro-forma earnings per share in the very low, single digits. This is also down dramatically from the 14 cents per share guidance Cisco gave in February and the eight cents per share analysts expected.

Cisco said it will take a restructuring charge of $800 million to $1.2 billion, and an additional charge of $2.5 billion for excess inventory in its fiscal third quarter, which ends in less than two weeks. The restructuring charge includes a headcount reduction of 8,500 people, 6,000 of whom are full-time employees.

Referring to the bloated inventory, Cisco CFO Larry Carter said in a statement: "Business demand consistently exceeded our expectations throughout most of calendar year 2000. And in an effort to meet our customer expectations we continued to increase our inventory and capacities to keep up with rising demand. This charge reflects the recent significant and unexpected drop in customer demand."

The company currently expects its fiscal fourth-quarter revenue will range from flat to down 10% sequentially.

Cisco blamed continued global economic challenges, the slowdown in the global telecom market and the deceleration in corporate IT spending for the downcast quarter. The United States continues to be challenging, especially in the enterprise and service provider areas of business, the company said.

Cisco also said it continues to see capital spending and macro-economic challenges expanding into other regions of the world. In the Asia Pacific region, Cisco is seeing weakness in Korea, Taiwan, Australia, and Japan. In Europe, Cisco is also experiencing weakness, primarily in the service provider market and in segments of the enterprise business.

"The business environment that our segment of the IT industry is facing has never been more challenging," said John Chambers, Cisco president and CEO, in a statement. "In fact, 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."

Cisco plans to report its fiscal year 2001 third-quarter results on May 8.

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