This news has disappointed some industry watchers who have been looking to the networking giant to set the pace for the sector. Cisco helped spark the rise of the networking industry over the past few years, and the company's strong earnings growth and flair for acquisitions gave it a leading role in the upswing.
Cisco's news also makes things less rosy for communications chipmakers like PMC-Sierra, Broadcom and Applied Micro Circuits, which depend on large companies such as Cisco for sales. Cisco estimated that its revenue would remain flat or drop 10 percent for its fourth fiscal quarter, and said it could not make predictions beyond that, making some analysts believe that an upturn is slow to come.
"I don't expect a snapback" for the telecommunications chip sector, said Arun Veerappan, an analyst at Robertson Stephens. Veerappan believes along with many other analysts that Cisco's bloated inventory levels will hinder a recovery and make the upturn a gradual rise rather than a quick bounce.
Cisco shaved its inventory write-off to about $2.25 billion from the $2.5 billion previously announced. Chief Financial Officer Larry Carter said the company does not expect to use the inventory in the next 12 months unless demand significantly improves, upon which the company would exclude the benefit from its pro forma margin results.
Veerappan believes that leaving the inventory out of the company's books gives Cisco a green light to use it eventually, which means pushing back the time when they order new gear from suppliers.
Other analysts regarded the news as a sign that Cisco's troubles may be ending. Jim Liang of WR Hambrecht points out that Cisco reiterated the revenue forecast it gave in April, holding the line in tough times.
Liang expressed little concern over Cisco's lack of visibility into the future and says it could be further proof that the company's fortunes will change.
"Poor visibility is a classical sign of a bottom. No one is going to tell you that they have great visibility when they are at a bottom," he said.
Others are not so sure. "Sooner or later, a body stops bleeding," said Sandy Harrison, an analyst at Pacific Growth Equities, who contends that downturns, like wounds, eventually stop hemorrhaging but with varied outcomes. The bleeding may have stopped, but the patient might not be better.
Harrison also thinks that Cisco's inventory problems might be more of a symptom related to a greater disease. Cisco received an extraordinary boost from now defunct dot-coms and start-up phone companies, otherwise known as CLECs, which boosted its business over the past two years.
"With dot-coms gone and with CLECs gone, we don't really know what the true growth rate is," he said. Cisco still clings to its long-term estimate of between 30 percent and 50 percent a year. Harrison thinks growth will follow the historical rates of between 25 percent and 30 percent--still stellar, but not in the stratosphere.
So with Cisco hanging on the ropes as punches keep coming, who will lead the chipmakers back? Probably companies that can digest inventory more quickly, said Robertson Stephens' Veerappan.
He thinks that Nortel Networks, Redback Networks, Juniper Networks, and Ciena can pick up the slack and return to making meaningful orders in about three months compared with Cisco's six months.
"All of those guys are much more efficient than Cisco in terms of using inventory, or rather not using inventory," Veerappan said.