Cisco Systems Inc, the No. 1 maker of computer-networking equipment, lost US$2.69 billion in its fiscal third quarter as revenue fell 4.2 percent, the first decline since the company went public in 1990.
The loss was US$0.37 a share, compared with net income of US$641 million, or US$0.08, a year earlier, the company said in a statement. Excluding charges and acquisition-related costs, profit would have been US$230 million, or US$0.03 a share, in the period ended April 28. Sales fell to US$4.73 billion from US$4.93 billion.
PHOTO: BLOOMBERG
Investors got few new details on Cisco's forecast for the rest of the year. Chief Executive John Chambers, on a conference call, repeated an earlier projection that fourth-quarter sales would be unchanged to down 10 percent from the third quarter. If low inflation, government surpluses and interest-rate cuts continue, he said, capital spending won't fall much more.
"It's more likely that now we have seen the bottom of their business," said James Lyon, money manager at Oakwood Capital Management LLC, which owns more than 80,000 Cisco shares. "Now it's just a question of how rapidly the business turns around." Cisco shares yesterday rose US$1.11 to US$20.36 on the NASDAQ Stock Market for their highest close in seven weeks. They fell to US$19.74 in recent after-hours trading. They've dropped 47 percent this year, on track for their worst annual performance ever.
Executives declined to give a forecast for fiscal 2002.
The company's book-to-bill ratio during the quarter was "approximately one," Chambers said, meaning that Cisco booked about US$1 in orders for every US$1 in revenue.
"It would not be a big surprise to see our growth on either side of this range," Chambers said of the fourth-quarter projection.
He didn't change the company's prediction that revenue will increase 30 percent to 50 percent a year in a healthy economy.
Many investors and analysts have criticized that forecast in recent months as being too high, especially given the bankruptcies among startup phone and Internet companies. In an interview, Chambers said the company will focus more resources on products for the larger local phone-service providers.
Chambers said demand in the UK, Germany and Japan has been weakening, while sales have been rising in China and India. In the US, the decline has been more pronounced: US customers accounted for 41 percent of worldwide orders in the third quarter, compared with 49 percent in the previous period.
"We are in a fairly uninspiring period in this market," said CIBC World Markets analyst Steve Kamman, who rates Cisco shares a "hold." "This outlook in the next three to four quarters does not look particularly good." On April 16, Cisco cautioned that revenue would fall 30 percent from the previous quarter because telecommunications companies and other corporations were buying less Internet gear amid a US economic slump.
Per-share profit, excluding the items, was in line with the reduced 2-cents-a-share average estimate of analysts polled by First Call/Thomson Financial.
Cisco took pretax charges in the latest quarter of US$1.17 billion for severance related to firing 8,500 workers, closing unused buildings and reorganizing parts of its business.
It took a pretax charge of US$2.25 billion to write off the value of computer chips and parts that the company said it couldn't use and thus were worthless. That's less than the US$2.5 billion charge the company estimated last month.
In response to questions and criticism from some analysts and investors about the inventory charge, Chief Financial Officer Larry Carter said the company will destroy any inventory as it becomes unusable. He insisted that if Cisco does use any of the worthless inventory, that will not inflate the unofficial "pro- forma" gross margin percentage that Cisco urges investors to watch.
He also broke the inventory into five categories: unfinished goods and subassemblies, US$450 million; memory chips, US$300 million; optical components such as lasers, US$450 million; electromechanical items including power supplies, US$150 million; and communications chips and other non-memory semiconductors, US$900 million.
Cisco Chief Strategy Officer Mike Volpi detailed which product lines have been eliminated because they weren't profitable enough. Those were mainly products targeted at phone and Internet companies.
The discontinued items include devices for video networking, software that combines e-mail and voicemail, and some gear for high-speed Internet access over cable and phone lines. In some unspecified cases, Cisco will join with another company or license its technology instead of completely terminating the product, Volpi said.
Cisco also had acquisition-related costs, before taxes, of US$455 million in the quarter, as well as US$10 million of payroll taxes on stock-option exercises.
In the year-earlier period, Cisco had US$539 million in pretax acquisition-related expenses and US$25 million in stock-option payroll costs. It also had a US$156 million gain on investments.
Excluding those items, profit in the year-earlier period would have been US$1 billion, or US$0.13 a share.
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