Cisco’s Slide Results in $2.69-Billion Loss
SAN FRANCISCO — Computer networking giant Cisco Systems reported a dismal $2.69-billion loss for its fiscal third quarter Tuesday and warned that sales may fall another 10% in the current quarter because of the worldwide technology slowdown.
Cisco said that many of its key markets will hit bottom within six months but made no specific predictions beyond the current quarter. “The company’s reluctance to share guidance for the next year means that while we may be close to the bottom, nobody has the foggiest idea what the shape of the recovery looks like,” said analyst Tad LaFountain of Needham & Co.
Cisco, the dominant seller of routers that direct data on the Internet, posted sales of $4.73 billion for the quarter that ended April 28, compared with a $1-billion profit, or 14 cents per share, on sales of $4.93 billion a year earlier.
Cisco has suffered a stunning series of setbacks, and recently announced layoffs of 8,500 workers and massive inventory write-downs because of a free-fall in sales from telecommunications customers.
These included restructuring charges of $1.17 billion in the latest quarter and an inventory write-down of about $2.2 billion--down slightly from Cisco’s previous estimate of $2.5 billion.
Excluding these one-time items, Cisco earned $230 million, or 3 cents per share, in its third quarter.
The company narrowly beat Wall Street’s diminished expectations. On average, analysts polled by First Call/Thomson Financial had predicted earnings of 2 cents per share.
In the quarter that ended in January, Cisco earned $1.33 billion or 18 cents per share, on $6.75 billion in sales. Tuesday’s announcement represents a 30% decline in revenue from the January quarter, in line with Cisco’s recent warning. The results were the company’s first quarter-to-quarter revenue drop in 11 years as a public company.
“Changes that used to take place over multiple quarters, and even years, now take place in months,” Cisco’s Chief Executive John Chambers said Tuesday.
Cisco said that sales this quarter may be flat, or possibly fall 10%, from the third quarter.
San Jose-based Cisco’s stock rose $1.13 in regular Nasdaq trading to $20.38, its highest level since mid-March. But in after-hours trading, Cisco shares fell 48 cents to $19.90.
Wall Street had hoped that the company would offer a stronger short-term outlook. A few analysts have noted an up-tick in capital spending by some large corporations following recent interest rate cuts. And Cisco recently inked new sales agreements with telecom services providers China Telecom and Global Crossing.
Other analysts predict scant near-term relief. Many U.S. telecom operators--including key Cisco customers--have reduced capital spending for the rest of the year, as have large European companies, according to Michael Ching of Merrill Lynch.
Cisco’s stock hit an all-time high of $82 per share last spring. Since then it has shed some 75% of its value--a jaw-dropping loss of more than $400 billion in market value.
The decline has called into question Cisco’s consistent assertion that its long-term growth rate will be 30% to 50% per year. Many industry analysts say that 20% is more probable.
Chambers defended his ambitious target to financial analysts Tuesday. But he also hedged his bets in light of the difficulties of the last quarter.
“When in doubt, we would encourage our investors to make their decisions based on the most conservative estimates,” Chambers said.
Cisco has come under fire for a number of accounting practices that critics say make it hard to judge the company’s financial health. These include the massive inventory write-down announced last month and a rise in questionable loans to customers.
Cisco has some $900 million loaned to customers for the purpose of buying Cisco equipment--up another $100 million from only last week. Given the dubious economic outlook, Cisco has been forced to reserve $800 million in the event that some loans will default.
Mike Volpi, Cisco’s chief strategy officer, said in an interview that the company has cut back new loans “dramatically” to reduce its exposure and that the company does not record the purchases as revenue until the loans have been paid.
UC Berkeley accounting professor Franco Wong said Cisco’s large write-down and high loan reserves may reflect a strategy of trying to absorb as much pain as quickly as possible.
“The market has a short memory,” Wong said. “If you miss [earnings] by 1 cent they hammer you. If you miss by 10 cents they do the same thing. So why not take a bath?” and set the stage for a more dramatic rebound.
“When a company resorts to tactics like [the large write-down] they are saying they are weak. They don’t have confidence in themselves,” said Robert Olstein, who manages the Olstein Financial Alert Fund in Purchase, N.Y., and is not invested in Cisco. “Until Cisco substantiates there’s going to be real growth, I’m not sure that its [stock is] underpriced.”
(BEGIN TEXT OF INFOBOX / INFOGRAPHIC)
Climbing Back
Cisco Systems’ shares have risen from their multi-year low of just under $14 reached in early April, but they remain far below last year’s peak.
*
Cisco shares, weekly closes and latest, on Nasdaq
Tuesday: $20.38, up $1.13
Source: Bloomberg News
