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Optical/IP

Cisco's Q3: Ouch!

In a word, Cisco Systems Inc.'s (Nasdaq: CSCO) third quarter for fiscal 2001 was brutal.

"You deal with the world the way it is, not the way you wish it was,” said Cisco CEO John Chambers in a conference call with analysts and investors this afternoon. And the world is now rather... well, brutal, as Cisco’s executives somberly telegraphed during the course of the call.

Cisco net sales for the quarter were $4.73 billion, down 4 percent from last year's $4.93 billion figure. But after considering the effects of the charges against earnings, the story becomes worse (see Cisco Reports Weak Q3).

During the quarter, Cisco recorded a $1.17 billion restructuring charge against earnings and took an excess inventory charge of $2.2 billion. Put another way, in just one quarter Cisco wrote off about half of all its 1996 revenues, due to excess (and largely unusable) inventory.

The company's pro forma earnings -- ignoring stuff like acquisition charges, payroll tax on stock option exercises, restructuring costs, and an excess inventory charge -- were $230 million or 3 cents a share. This is a 77 percent drop from its year-ago number of $1 billion or 13 cents a share.

In one year’s time, Cisco’s earnings per share have crashed. A year ago, Cisco’s Q3 net earnings were $641 million or 8 cents a share. Cisco’s actual net loss for this year's third quarter was $2.69 billion or 37 cents a share.

Cisco CFO Larry Carter attributed the significant drop in revenues to three things: an unfavorable product mix, slowed shipping volumes and increased overhead, and an increase in deferred revenue.

Last month, 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 suggested 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 (see Cisco's Inventory Woes Mount).

The slowing economy’s effect on service providers was illustrated in one rollicking anecdote Chambers relayed regarding Cisco’s sales to alternative carriers, such as CLECs. The company had previously been accustomed to book $500 million worth of orders each quarter from that one group of customers, he said. But this quarter, the number of orders from those carriers dropped by about 75 percent.

On the call, Cisco CFO Larry Carter detailed the firm’s excess inventory charge for analysts, pointing out that it was a bit less than the $2.5 billion the firm had previously expected. He attributed 80 percent of the excess inventory to raw materials, including about $300 million in semiconductor memory; $450 million in optical components such as lasers and transponders; $150 million in electo-mechanical parts; and $1.3 billion in other non-memory components, such as ASICs. The other 20 percent, or $400 million, of the excess inventory charged off was attributed to “work-in-progress,” or subsystems.

Carter also assured investors that Cisco would exclude from its pro forma results any benefit the company realizes from selling the inventory. Most of Cisco’s parts are custom made, and any income from sales of its excess inventory would be “nominal,” Carter said.

Apparently, Cisco investors had already been prepared for the worst. In regular trading today Cisco shares climbed $1.13 to $20.38. In after-hours trading on the Island ECN, Cisco’s stock had dropped slightly to 19.70.

— Phil Harvey, Senior Editor, Light Reading
http://www.lightreading.com
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wwei 12/4/2012 | 8:27:41 PM
re: Cisco's Q3: Ouch! Just see the subject.
lighter 12/4/2012 | 8:27:40 PM
re: Cisco's Q3: Ouch! Everyday more Internet Traffic is passing through
the systems of Juniper Networks and other companies equipment. Are you Ready for
the shifting winds of technology?
Belzebutt 12/4/2012 | 8:27:39 PM
re: Cisco's Q3: Ouch! Ever see that FedEx commercial? :)
hippo 12/4/2012 | 8:27:38 PM
re: Cisco's Q3: Ouch! Chambers blamed the macro-economy. It was only half true, he forgot to mention his company is losing market share left and right...
optinuts 12/4/2012 | 8:27:38 PM
re: Cisco's Q3: Ouch! cisco didn't provide any details on its announcement. anyone know what the real shortfall areas were?
lighthearted 12/4/2012 | 8:27:37 PM
re: Cisco's Q3: Ouch! The fact that management made a $2.2bn inventory mistake (coupled with the 2 hour earnings call) shows that management is comprised of marketeers (read mouseketeers) and not manufacturing / process control experts.

It is time for them to run the company in a responsible manner by compacting the supply chain in order to avoid future boom/bust cycles. Toyota does it, why can't Cisco?
Belzebutt 12/4/2012 | 8:27:37 PM
re: Cisco's Q3: Ouch! "cisco didn't provide any details on its announcement. anyone know what the real shortfall areas were?"

*cough*core routers*cough*
hitechguy 12/4/2012 | 8:27:35 PM
re: Cisco's Q3: Ouch! lighthearted said:

"It is time for them to run the company in a
responsible manner by compacting the supply
chain in order to avoid future boom/bust cycles.
Toyota does it, why can't Cisco?"

Predicting for demand that can increase/decrease
varies by 10% per year is fundamentally different
than predicting demand that varies by more than
100% up or 50% down. When there is huge
potential upside, you have to make big bets that
you can succeed, or you will definitely fail.

There is an excellent Harvard Business School
case study which shows exactly how this happens.
When you have rapid changes in end-user demand,
and you do not sell directly to the end-user,
the oscillations get amplified at each step
along the supply chain.

To illustrate:

* Analysts predict big demand for high-bandwidth
services. "Build it and they will come."
* Lots of service providers pop up to fill this
demand. Investors pour money into these
service providers. Not everyone will live
as a business, but they will all start by
buying equipment to get into the game.
* Cisco/Nortel/<pick favorite="" vendor="" you=""> sees
a huge increase in demand for their product.
They make big bets that this demand could
continue, and that they will win a good
portion of it. Of course, Juniper/Ciena/
<pick 2nd="" favorite="" here="" vendor="" your=""> also
make the same bet, with the predictable
result that there is too much supply (say 2x
too much).
* Components folks see this explosive growth
from <cisco, juniper="">, <ciena, nortel=""> so
they all make big bets that the market
will continue to grow and that they will
win a good portion of it. At this point,
you have components companies delivering
about 4x what the market will really want,
when it starts slowing down.

The market slows down (there was not quite
as much demand as the analysts thought), and
the casualty list starts building quickly.
The companies that win market share <juniper,<br>Ciena> do not see this slowdown as quickly,
because they are eating into someone else's
market share. But if the market has fundamentally
slowed, it is just a matter of time.

hitechguy</juniper,<br></ciena,></cisco,></pick></pick>
brichter 12/4/2012 | 8:27:32 PM
re: Cisco's Q3: Ouch! The winner of what test?
skeptic 12/4/2012 | 8:27:30 PM
re: Cisco's Q3: Ouch!
That test was on one specific product and market segment. Cisco's breadth of products (and consequently market exposure) makes it difficult to directly compare their overall results with that of juniper which (still) is mostly selling one basic product (the M40) in five different forms (M5-M160).

If you dig into the results of both companies, your going to find that there is still considerable demand in some product segements, but that in others spending has evaporated.
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