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Cisco is searching for a bright spot

Cisco is searching for a bright spot

Cisco Systems posted the first quarterly loss in its 17-year history but suggested that the once high-potency networking market could hit rock-bottom in the next quarter or two.

The networking giant acknowledged what has become increasingly obvious in the past five months: the peaks and valleys of the new economy are much higher and lower than the economic swings of the past.

"Changes that used to take place over multiple quarters, or even over years, now take place within months," embattled Cisco chief executive officer John Chambers told Wall Street analysts in a conference call. "We underestimated how quickly the valley could occur."

Nevertheless, Chambers maintained that he was optimistic about the company's future. "Visibility going forward is more difficult than we've ever seen," he said. Yet "we see positive indications that could result in a bottom in the next two to three quarters" in the corporate market place.

Until that comes to pass, Cisco's financial results will likely show little improvement, especially with business conditions in much of Europe and Asia beginning to slow. For its third quarter ended in April, Cisco posted a loss of $2.69 billion (37 cents a share). That included a $1.17 billion charge for laying off 8500 full and part-time workers, as well as a $2.2 billion write-down of outdated inventory.

Cisco's revenues for the period came to $4.7 billion, slightly less than the $4.9 billion posted for last year's third quarter. Showing that the company has been discounting its products in an effort to win sales, the quarter's gross margin slumped to 54.5 per cent from 61.8 per cent last year. Some of the pricing pressure has come from the second-hand market, where used Cisco gear is plentiful and inexpensive.

Sales to corporate customers in the US for the period fell 20 per cent from the second quarter, and sales to the once hot telecommunications market plunged more than 40 per cent.

Nevertheless, Cisco stood by past expectations that its networking market would grow 30 to 50 per cent annually over the long term. The company also tried to dispel speculation that it would use its excess inventory to shore up future results. With these products already written off (paid for), they could theoretically be sold in the future for pure profit. Cisco said it will not take such action.

The write-off was "much larger due to a sudden and significant decrease in our demand forecast," said chief financial officer Larry Carter. "We do not anticipate this excess inventory will be used at a later date.

Chambers said he has learned several painful lessons from the pullback in the tech economy. Many on Wall Street blame him for ignoring the early signs of the slowdown last year and failing to rein in Cisco's business expansion.

The company must not underestimate how quickly the economic climate can change and learn to respond to the troughs more effectively, Chambers said.

"You deal with the world the way it is," he said, "not the way you wish it was."


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