Cisco's Not Kidding

Communications Today, April 18, 2001

By Bruce Sullivan, bsullivan@pbimedia.com

Put on your seatbelts, warns Cisco [CSCO] CEO John Chambers, the telecom slowdown is happening so fast that G forces are throwing workers and profits right out the door.

On Monday, Cisco announced it is cutting 8,500 jobs, or 17 percent of its workforce. The company also warned that revenues for the third quarter ending April 28 would be approximately $4.72 billion, a 30 percent decline from second quarter revenues of $6.7 billion. In the year-ago third quarter, Cisco had $4.9 billion in revenue. The company plans to report its third-quarter results on May 8.

"The business environment that our segment of the IT industry is facing has never been more challenging," Chambers said in a statement. "In fact, this may be the fastest any industry our size has ever decelerated, which has required us to make difficult decisions at an unprecedented speed."

Less than a year ago, Cisco's revenues were growing at more than a 50 percent annual rate, and the company had trouble keeping up with the demand for its products. Now, the Internet and telecommunications equipment-manufacturing giant has more than a year's worth of unsold inventory on its hands, according to Chambers.

Cisco's phenomenal growth rate was bound to slow down eventually, said CIBC World Markets Analyst Stephen Kamman. It's difficult, if not impossible for a company the size of Cisco to continually grow at 30 percent to 50 percent a year, especially during both a macro-economic and secular telecom slowdown, Kamman added. Cisco is in the middle of a transformation from a high-growth, newer company to that of a slower, but steadier, growing blue chip company, Kamman told Communications Today.

"This is every businessman's dream," Kamman said. "You want to become a blue chip, but blue chips by definition tend to become steady growers. Their days of spectacular growth are, almost by definition, behind them."

The Bottom Line

Cisco expects third-quarter earnings to be in "the very low, single-digit range." What does that mean? One cent, or two cents a share? Before this latest warning, analysts were expecting 8 cents a share. Now it looks like the only thing to expect from Cisco for a while is more bad news.