Cisco Predicts Q2 Plunge

Officially smacked by the economic downturn, Cisco plans to cut $1B in expenses as it faces a decrease in revenues

Craig Matsumoto, Editor-in-Chief, Light Reading

November 5, 2008

3 Min Read
Cisco Predicts Q2 Plunge

The storm has arrived.

Cisco Systems Inc. (Nasdaq: CSCO) is preparing $1 billion in expense reductions as the company is forecasting a decrease in revenues for the current quarter, which will end in January.

At the same time, CEO John Chambers, speaking on today's earnings call, laid out Cisco's game plan to prepare for the eventual recovery of the global economy. Chambers continues to tell investors that Cisco has come out of each downturn stronger than before.

Cisco is putting a freeze on hiring, but Chambers made no mention of layoffs.

One key here is that Cisco's first quarter included October, the month when the U.S. economy really slumped. That makes Cisco one of the first technology companies to report what happened in October -- and it wasn't pretty.

In August, Cisco was seeing an order rate 7 percent higher than it had a year earlier. By October, orders were down 9 percent from the previous year.

That means pain. Cisco says its second-quarter revenues will fall 5 to 10 percent compared with a year ago. That's a range of $8.8 billion to $9.3 billion, compared with the $10.3 billion analysts were predicting, according to Reuters Research .

Cisco still clings to a long-term growth figure of 12 percent to 17 percent, presuming the economy eventually returns to normal. But Chambers's cocksure forecasts of last year are long gone. "This is probably the second most difficult time in my career in terms with my comfort with the forecast," he said.

So, what to do?

First, Chambers believes Cisco's strategies -- including big bets on collaboration and Web 2.0, and the rearranging of the company into councils and boards rather than a strict hierarchy, are still correct.

But Cisco will aim to cut $1 billion from its budget for fiscal 2009, which ends in July. Chambers listed several areas for cutbacks, including travel, events, and prototype marketing.

At the same time, Chambers wants to keep Cisco on the offensive. One area of investment will be the United States, where Cisco plans to pour money into adjacent markets that will eventually tie in with Cisco's networking products. "In our opinion, the U.S. will be the first to recover," he said.

Cisco also wants to cozy up to emerging countries including China and India, spending even more money in those areas. "Over time, we expect the majority of the world's GDP will come from these countries," Chambers said, noting that Cisco followed a strategy similar to this during the 1997 Asian financial crisis.

For its first quarter, which ended Oct. 25, Cisco's revenues landed on target, at $10.33 billion, slightly less than $10.36 billion last quarter. (See Cisco Reports Q1.)

In net income, Cisco reported $2.2 billion, or 37 cents per share, according to generally accepted accounting principles (GAAP). That's compared with $2 billion and 33 cents per share the previous quarter.

Cisco's non-GAAP net income of 42 cents per share beat Wall Street estimates by 3 cents.

During Cisco's earnings call, Reuters was reporting the company's stock was down 6 percent after-hours, after ending the day at $17.39 per share.

— Craig Matsumoto, West Coast Editor, Light Reading

About the Author(s)

Craig Matsumoto

Editor-in-Chief, Light Reading

Yes, THAT Craig Matsumoto – who used to be at Light Reading from 2002 until 2013 and then went away and did other stuff and now HE'S BACK! As Editor-in-Chief. Go Craig!!

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