Large Q3 loss rattles Cisco

(Telephony) Cisco Systems recorded a steep quarterly net loss and declining revenues in its fiscal third quarter as the vendor said macroeconomic issues and the capital-spending slowdown caused a rapid deterioration in the its financial performance.

Cisco’s net loss for its fiscal third quarter was $2.69 billion, or 37¢ per share, compared with a net income of $641 million, or 8¢ per share, for the third quarter of 2000. The company recorded one-time charges for restructuring costs and other items of $3.9 billion, including $2.2 billion for excess inventory.

Excluding the charges, Cisco recorded a pro forma net income of $230 million, or 3¢ per share, compared to net income of $1.0 billion, or 13¢ per share, in the year-ago quarter. The results beat reduced analysts’ estimates by a penny, according to First Call/Thomson Financial.

Cisco’s revenue dropped to $4.73 billion, down 4% from the year-ago quarter and a 30% decrease from the company’s fiscal second quarter.

“The first four months of 2001 were extremely challenging, as we went from year-over-year bookings in excess of 70% in November to 30% negative growth within a span of several months,” said a statement by John Chambers, Cisco’s president and CEO. “This may be the fastest deceleration any company of our size has ever experienced.”

The downturn will continue to affect Cisco, as the company expects sales growth to be between flat and a negative 10% in the current quarter ending July 28. No guidance for fiscal year 2002 was provided.

“We are now in a valley much deeper than any of us anticipated,” Chambers said. “In the short term, visibility going forward is more difficult than we’ve ever seen.”

Chambers said there are a number of signs that indicate the market slowdown is reaching a bottom but the company expected more consolidation and bankruptcies among emerging service providers. The slowdown in capital spending by IXCs, ILECs, and PTTs could get tougher before it improves, especially internationally, he said.

Long term, however, Cisco expects its markets to return to a 30% to 50% growth, assuming good macroeconomic conditions and growth in capital spending.

Cisco’s restructuring plan involving layoffs of 8500 workers and a goal to cut annual operating costs by $1 billion are on schedule, according to Chambers. Cisco’s headcount has been reduced by 3,401 workers, and the company will shed another 1,160 workers by July. All terminated workers will be notified by the end of the fourth quarter, Chambers said.

In the third quarter, Cisco recorded a charge of $397 million to cover severance expenses and $484 million to cover consolidation of facilities. The $2.2 billion inventory charge was less than the $2.5 billion projected on April 16.

In response to questions about what would be done with the written-off inventory, 80% of which is raw materials, Cisco Chief Financial Officer Larry Carter said the inventory would be scrapped as it becomes unusable. He said Cisco would only use the inventory is there was a “significant, positive shift” in demand for its products and would exclude any sales of systems using the components from the reporting of future pro forma gross margins. Cisco plans to disclose the status of the inventory reserve on a quarterly basis.

Cisco shares suffered a minor decline after hours and were off 5% in morning trading.