Cisco profit warning rocks Wall Street

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Offering fresh evidence that economic growth is slowing notably, Cisco Systems has announced that its sales and profit were falling far short of expectations. Cisco, whose startling success in the 1990’s mirrored the rise of the Internet, blamed a worldwide economic slowdown for its problems.

The boom in communications and information technology spending, which powered the US economy in the late 90’s, has ended in painful retreat for Cisco and other technology companies that a few months ago could seemingly do no wrong.

Cisco equipment supports much of the Internet, and over the last decade it has grown from a tiny start-up in San Jose, Calif., to a corporate titan. At its peak a year ago, Cisco, which leads the market for routers, computers that manage data traffic on a network, was briefly the world’s most valuable company. In March 2000, its market capitalization reached a peak of $560 billion.

But now Cisco, which as late as last fall was reporting quickly rising sales, is shrinking faster than it grew. The company estimates that its sales for the quarter ending April 30 would be about $4.7 billion, 30% lower than in the previous three months. And Cisco warned not to expect a quick rebound, predicting that sales would fall again next quarter, ending July 31.

With revenue declining so rapidly, Cisco has been caught with big surpluses of its equipment. The company said that for accounting purposes it would reduce the value of inventory by $2.5 billion this quarter, including $500 million in partly completed equipment and $2 billion of raw materials like computer chips. The accounting procedure, known as a write-down, reflects Cisco’s belief that it will not be able to sell the equipment for as much as it once expected.

“This may be the fastest any industry our size has ever decelerated,” chief executive John Chambers, said in a statement. In a conference call later, he compared the slowdown to a 100-year flood, adding that the economic challenges confronting the network equipment industry are proof that “a 100-year flood can happen in your lifetime. We never built models to anticipate something of this magnitude,” he said.

Most of Cisco’s sales are in the United States, where the recent economic slowdown has been most pronounced. But the company said that problems appeared to be spreading worldwide. “Cisco is seeing weakness in Korea, Taiwan, Australia and Japan,” the company said in its statement. “In Europe, Cisco is also experiencing weakness.”

In addition to the inventory writedown, Cisco will set aside $800 million to $1.2 billion to cover the cost of laying off employees, closing offices and marking down other assets. The company, which said in March that it would lay off 8,000 employees, raised the figure to 8,500 yesterday. Cisco now employs about 44,000 workers.

Cisco said that its profit for the current quarter would fall well short of expectations. Excluding the one- time charges, it said it would report only a small profit. Analysts had expected the company to earn about $700 million. Including the various write-offs, Cisco will lose about $3 billion in the current quarter, more than it made in all of last year.

Tom Lauria, analyst at ING Barings, said: “My real concern is not about Cisco. 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.” America’s biggest technology companies such as Intel, IBM and Microsoft report first quarter results this week and investors are wary that they will warn about future profits.

Ozan Akcin, an equity strategist at Thomson Financial, calculates that 844 US companies have warned they will miss Wall Street’s estimates for the first quarter, compared with 162 firms warning in the same period of last year. He said: “That’s a huge increase. It’s the worst reporting season for the first quarter in our history.”

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