Cisco's Inventory Woes Mount
Analysts previously thought Cisco’s earnings for fiscal Q3 would be around 11 cents a share. The company’s year-ago quarterly earnings were 14 cents a share.
The networking giant said revenues for Q3 would be about $4.69 billion, down about 30 percent sequentially from its Q2 revenues of $6.7 billion. For its fourth fiscal quarter, Cisco executives timidly offered that revenues would be in the range of $4.22 billion to $4.69 billion, or flat to down 10 percent when compared with Q3.
CEO John Chambers added, “It would not be a big surprise to see our growth on either side of this range.” In other words, things could be better, or worse. The final numbers for Q3 will be announced on May 8.
Cisco also verified today that it is cutting 8,500 jobs overall, including 2,500 temporary and contract workers. In March Cisco estimated its total job cuts to be between 2,500 to 3,000 temporary and contract workers and 3,000 to 5,000 regular employees (see Cisco Slashes Jobs, Costs).
During the quarter, Cisco will take a $300 million to $400 million charge related to job cuts, but ultimately it expects the cuts will save the company about $1 billion a year.
Cisco also said that it would take a charge against earnings of about $2.5 billion due to excess inventory. Even worse, Cisco CFO Larry Carter told analysts that they “should not make an assumption that [the inventory charges] are [only] related to discontinued products.” In other words, Cisco is hinting that there may be more bad news in this vein as it probably hasn’t finished assessing how the cancellation of its wavelength router product will affect its inventory (see Cisco Kills Monterey Router).
How did Cisco end up with so much unsold stuff? CEO John Chambers explained to analysts today that, back when there was a components shortage, Cisco put certain purchase agreements in place to make sure it was one of the most reliable systems vendors. Of course, when the economy drove Cisco's business off the cliff, the company was stuck with materials it didn't need.
About 70 percent of Cisco’s excess inventory charge relates to its service provider business, and 80 percent of the total charge is comprised of raw materials for components, Carter says.
Analysts questioned Chambers repeatedly about whether this inventory buildup would lead to a price war in the systems space, but Chambers shook off every hint that Cisco would win by undercutting its competitors. “I don’t really see price being the primary decision point, even in today’s environment,” Chambers says.
“What we are experiencing is a single quarterly decrease of approximately 30 percent,” Chambers says. “We never build [financial] models to anticipate something of this magnitude.”
-- Phil Harvey, Senior Editor, Light Reading http://www.lightreading.com