Cisco: Making lemonade from economic lemons

Technology bellwether Cisco Systems expects sales to dip as much as 20 percent next quarter, but the optimistic CEO said that a stronger company will emerge post recovery.

Cisco
Updated at 3:45 p.m. PST: Upated throughout with information from the company's conference call.

Cisco Systems' optimistic leader John Chambers noted during the company's conference call Wednesday that the economy has gone from bad to worse as sales are expected to slip as much as 20 percent in the next quarter. But he said that Cisco is well-positioned to emerge even stronger after the economic malaise.

Chambers noted that revenues for the company's third fiscal quarter, which ends in April, will be down 15 percent to 20 percent from the previous year. In dollars, this means revenue are expected to be around $7.83 billion to $8.32 billion. Analysts had expected a forecast of about $8.71 billion, according to Thomson Financial.

Three months ago during the company's first-quarter earnings call, Chambers noted that the economic downturn had spread from the U.S. to Europe. This time around, he said that it is now affecting countries throughout the world.

"The challenges we saw in the U.S. in our first-quarter call have spread globally," he said.

Chambers said most of his customers don't expect the economy to get better until 2010. But always the optimist, he believes things will turn around more quickly than many people believe. Although he was careful not to cite a specific time frame for recovery, he said the Obama stimulus package in the U.S. and efforts by other governments throughout the world should help kick-start the economy around the globe stimulate a recovery.

The U.S. will be the first to recover, he added. And even though he expressed concern for the troubled times the company faces, he emphasized that Cisco is well positioned to come out of an economic downturn even stronger. He noted past economic dips where the company emerged an even more competitive player. And he vowed to aggressively invest in new markets to ensure the same is true when the economy becomes healthy once again.

"We must gain from this economic pain," he said. "This downturn is the biggest challenge of our lifetime, but it's also the biggest opportunity for the company and the country to change our economy.

In an effort to stay focused on its goals, Cisco has vowed to cut $1 billion spending for fiscal 2009, which ends in July. And Chambers said the company is on track to meet that goal.

But he added that Cisco is not planning any major layoffs, which he defined as a cut of at least 10 percent of the company's workforce. Instead, he said the company is realigning business units and refocusing resources and headcount on growth areas. In doing this, he said that some jobs will be lost. As a consequence, Cisco will shed between 1,500 and 2,000 through this realignment. Cisco currently employs 67,000 people worldwide. Chambers also emphasized that this activity is normal for the company and is done both in good times and in bad times.

Cisco, which sells Internet equipment to service providers and large companies, reported net income of $1.5 billion on sales of $9.1 billion for is second fiscal quarter, which ended in January. Despite the fact that sales dipped 7.5 percent from the same quarter a year ago, they were slightly better than what analysts had expected. Analysts had expected revenue to dip about 12 percent year-over-year to about $9 billion.

The company's earnings per share was 32 cents, down about 15.8 percent from the same period a year ago. This was better than analysts had expected. Analysts were expecting Cisco to earn 29 cents to 30 cents per share.

"Cisco showcased solid financial strength during a period of significant economic challenge," Chambers said in a statement. "We remain comfortable with our long-term vision and strategy as we move into new market adjacencies and prioritize our existing opportunities."

 

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