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Optical/IP

Cisco's Inventory Woes Mount

Cisco Systems Inc. (Nasdaq: CSCO) executives cited plummeting demand for its products as it announced today that its financials would continue to get worse before they get better (see Cisco Projects Revenue Dip). The company still expects to show a profit for its third fiscal quarter of 2001, but it now expects pro-forma earnings to be “in the very low, single-digit range.”

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
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luxPath 12/4/2012 | 8:33:35 PM
re: Cisco's Inventory Woes Mount WOW !

if components comprise $2B of this figure, as reported, will they be obsolete by the time a recovery would consume them???

if this strategy was pursued so as to be a reliable systems provider, have the other reliable firms had similar problems (NT, Ciena)??
Belzebutt 12/4/2012 | 8:33:34 PM
re: Cisco's Inventory Woes Mount This time last year everyone was blasting NT because they didn't predict the huge demand for their products and didn't have enough production capacity. NT moved quickly to build extra factories, and now that they're finished suddenly the market says "whoops, we don't need extra capacity". Everyone got screwed, real-world infrastructure simply can't move as fast as this market. The only thing you can do is build too little capacity like Juniper and then piss off your customers who are wondering why their parts haven't shipped yet, but then you won't bee stuck with excess capacity.
gladysnight 12/4/2012 | 8:33:33 PM
re: Cisco's Inventory Woes Mount "The only thing you can do is build too little capacity like Juniper and then piss off your customers who are wondering why their parts haven't shipped yet, but then you won't bee stuck with excess capacity."
-----------------------------
It's not the only thing you can do, you just need to bring some imagination to the problem.

Like offering your component suppliers longer term deals, like not trying to slaughter them (just rough them up a little) on price when you think you have the upper hand (which I strongly suspect Cisco has done often), in return for a scalable deal, up or down, which still gives you preference.

In the IT marketplace this sort of give & take tradeoff is de riguer (at least where I come from).

It was Mises who observed that anything you care to name can only be a means in the mind of a man with an end, therefore the only crises are crises of imagination. (except the ones where you're physically bleeding, those are real :-)

Good Hunting
hippo 12/4/2012 | 8:33:29 PM
re: Cisco's Inventory Woes Mount As I've said before, first LU, then NT, now CSCO...

RIP, the FORMER big 3. So much about being the largest optical networking equipment vendors. The lesson here is, "the largest" does not mean "the best".
StartUpGuy1 12/4/2012 | 8:33:29 PM
re: Cisco's Inventory Woes Mount This is very humorous "I donGÇÖt really see price being the primary decision point, even in todayGÇÖs environment,GÇ¥ Chambers says.

He must not have told his entire sales organization about price not being the decision points. They are dropping their shorts in EVERY DEAL. They are discounting the Cerent 15454 to the point where it will compete with Gigabit Ethernet switches. They are doing anything they can to book business. They are even promising carriers that Cisco will guarantee that carrier service business from Cisco customers, and putting it in writing.. Just a discount disguised...

So much for John C's comments...
wonderfull 12/4/2012 | 8:33:28 PM
re: Cisco's Inventory Woes Mount Any news on what product lines/BUs are being
downsized/canned?

Girish
Opto-Prozac 12/4/2012 | 8:33:28 PM
re: Cisco's Inventory Woes Mount C'mon guys - it ain't that bad...

The industry has only contracted 90% in terms of market cap...THERE'S STILL 10% LEFT!

Housing is beginning to loosen up here in the Valley, what with all the newly "job-liberated" vacating their places through ritual defenestration. If you still have two pennies to rub together, real estate prices have already fallen 25% throughout 2001, and are only 17X what they were a year ago! VHAT A BAHGAN!

The weather is warming up! McDonald's El Camino in Menlo Park, and three Starbucks locations in South San Francisco are hiring!

I'd say things are looking up!!!
Belzebutt 12/4/2012 | 8:33:25 PM
re: Cisco's Inventory Woes Mount "RIP, the FORMER big 3."

Ummm... so who's NOT doing bad? Sycamore, Corvis, everyone is hurting, not just the big 3. Juniper and a couple of others seem to have been spared but their stock is also hurting and they are nowhere near surpassing the "big 3". Come on, get real...

hippo 12/4/2012 | 8:33:18 PM
re: Cisco's Inventory Woes Mount yes, Juniper and Ciena and others are not going to surpass the "big 3" *at this point*. But as the economy recovers and a few years down the road, I think they WILL...

Is it easier to do house-cleaning in a 2-bedroom apt, or in a 30 room mansion (where everybody is expecting everybody else to do the cleaning)?

One funny fact. The Market went up when Juniper and Ciena came out and beat the estimate, and raised the outlook; the market ALSO went up when LU and CSCO post massive warnings, write-offs and job cuts...

LU I can understand, they can go out of business and nobody cares anymore, maybe except their stock holders. CSCO is almost relegating to that category. I love this headline from Yahoo! Financial news: "Intel Beats, as Investors Say Cisco Who?"
kbkirchn 12/4/2012 | 8:33:17 PM
re: Cisco's Inventory Woes Mount opticaluser wrote:
"He must not have told his entire sales organization about price not being the decision points. They are dropping their shorts in EVERY
DEAL. They are discounting the Cerent 15454 to the point where it will compete with Gigabit Ethernet switches."

Hello? A Sonet ADM with ethernet ports is cheaper than a full ethernet switch. If you think otherwise, you've been buying NT/LU products for too long... An ADM only does PtoP ethernet connections (mapping them to STS or VT channels), where as ethernet switch does MPtoMP connections across a shared backbone media (GigE, Sonet, ATM, etc).

opticaluser wrote:
"They are doing anything they can to book business. They are even promising carriers that Cisco will guarantee that carrier service business from Cisco customers, and putting it in writing.. Just a discount disguised..."

The "Cisco Powered Network" or CPN is Cisco's way of compensating their enterprise sales guys to sell a SP's service in lieu of selling gear for the customer to build their own private network. Yes, it does produce results, or at least has for us. It's Cisco's trump card and naturaly they play it for all it's worth, wouldn't you?

Which Cisco competitor do you work for?
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