Posted on: Wednesday, August 8, 2001

Cisco just breaks even in networking slump

USA Today

Investors in tech stocks didn't get much reason for confidence late yesterday when Cisco Systems said it merely broke even for the latest quarter and didn't offer hope of a recovery this year.

Showing just how hard the telecommunications and networking slowdown is hitting, Cisco reported net income of $7 million in the fiscal quarter that ended July 28, down 99 percent from the $796 million it earned last year.

Revenue of $4.3 billion met estimates but was down 25 percent from last year.

Even excluding a raft of one-time charges, the company's earnings of $163 million, or 2 cents a share, were down 88 percent from a year earlier. The earnings were in line with analysts' estimates. Also excluded: a $187 million gain from scrapping or selling at low prices part of the $2.2 billion of excess inventory written off earlier.

For the full fiscal year, Cisco lost $1 billion — one of the few times it has had an annual loss.

And Cisco offered investors no sign its business will get better soon. "No one really knows when capital spending will bottom out and turn up," Chief Executive Officer John Chambers said. It could be another quarter or two before the company's growth resumes, Chambers said.

Chambers still said the networking giant can increase revenue 30 percent to 50 percent a year but was less certain, calling it a "stretch goal." Other trouble signs:

• Problems in Europe and Asia are worsening. Cisco gets about 44 percent of revenue from Europe, Asia and Japan. "Europe and Asia Pacific may get worst before it gets better," Chambers said.

• Profit margins are under pressure. Cisco kept just 52 cents of every $1 of sales before paying overhead, compared with 64 cents last year. Cisco says profitability fell because it shipped fewer products than a year earlier. That means more drastic cost-cutting, including layoffs, may be needed if growth doesn't pick up, says Martin Pyykkonen, analyst at C.E. Unterberg Towbin.

• CEOs of companies that buy networking gear are still extremely stingy. Chambers said those CEOs will "loosen the purse strings" once the economy picks up. But facing a weak economy, companies are spending on tech only where there's an immediate savings, says David Willis, vice president at market research firm Meta Group.

In fact, spending on switching and routing will fall 11 percent in 2001 to $6.9 billion in North America, says RHK, a market research firm.