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Tech Industry

2HRS2GO: Save the sob stories for the country club set

    Chief executive officers at major tech firms are throwing around words like "unprecedented" and "dramatic" to describe the rate of order cancellations for equipment in the past few months. Of course, these guys were using those same words to characterize their business just a couple quarters ago.

    While no one can argue the economy has hit the skids in the past year, these executives' claims of "shock" and despair ring hollow considering most of the bogus dot-coms that were placing huge orders for network equipment, buying $1 million Super Bowl advertisements and hiring marketing consultants were either broke or close to it by the summer of 2000.

    For these leaders of industry to say this rapid "deceleration" of orders has caught them unawares is just as disingenuous as it was for them to project 50 percent or 60 percent sales growth above already record levels when the bulk of the customers that made that growth possible have gone the way of Chapter 11.

    Cisco Systems (Nasdaq: CSCO) provided further evidence of this astonishingly rapid collapse after the bell Monday, warning that sales and earnings for the current quarter will fall short of already reduced estimates.

    "The business environment that our segment of the IT industry is facing has never been more challenging," Cisco Chief Executive John Chambers said in a statement. "In fact, this may be the fastest any industry our size has ever decelerated."

    Note to Chambers: The industry never would have grown to that size had it not been financed--almost exclusively--by Wall Street for the better part of three years. Moreover, your company would never have grown to its unwieldy size had it not been for the aggressive acquisition strategy you employed only because your company's stock price was trading at such an astronomical valuation.

    With the stock stalled at around $17 a share and unlikely to move much above that for at least the next year, the days of buying two or three companies a month to stay on the cutting edge are over.

    Not only will Cisco miss third-quarter sales targets by $1.2 billion, but it will also write off more than $2.5 billion in excess inventory, stuff that will be given away or thrown away in a year because it's already obsolete.

    "Cisco had the most exposure to this because it was the company benefiting the most from an economy that was essentially being funded by venture capitalists," said Bill Becklean, an analyst at SunTrust Equitable Securities. "VCs were financing the demand for Cisco's equipment through these dot-coms. Once they started going out of business, this is what you get."

    What you also get are a bunch of pink slips, another 8,500 for Cisco employees Monday to go with the tens of thousands of others laid off everywhere from Pets.com to Intel in the past year.

    "We've seen slowdowns of this magnitude before, just never in such a short period of time," said Fred Wolf, an analyst at Adams, Harkness & Hill. "These companies were running fast trying to keep up with projections made at a time when there was a scarcity of supply."

    Lam Research (Nasdaq: LRCX) offers a great example of just how quickly things can go sour in a down market.

    The chip-equipment maker missed analysts' estimates in its latest quarter and announced more layoffs even though just one quarter ago it set all-time records for new orders and total sales.

    Chief Executive Officer Jim Bagley said the abrupt halt in new orders this quarter "was beyond anything I've ever seen in my career."

    "When your orders drop from a peak level to a trough level in 90 days, it does shake your confidence," he said. "Literally, every week the orders dropped."

    It didn't help that most of Lam's customers in Asia were closing out their fiscal year and desperately needed to trim costs to dress up their final numbers.

    "A lot of companies are outsourcing a lot of the manufacturing these days, so they can react more quickly to a downturn," Wolf said. "It makes it a lot easier to lay off employees now than in years past where companies were more inclined to hang in there longer."

    On Monday, Vitesse Semiconductor (Nasdaq: VTSS) met analysts' reduced estimates in its second quarter but lowered estimates for the third quarter. As a supplier of communications chips to the likes of Cisco and Lucent Technologies (NYSE: LU), it came as little surprise that Vitesse had its own heartbreaking story.

    "It was a very poor quarter," Chief Executive Officer Lou Tomasetta said. "Very disappointing. In our experience over the past 17 years at Vitesse, we've never seen a situation where essentially every one of our customers reduced their forecasts at the same time."

    That may be true, Lou, but I'm sure you had never seen a period like the past two years when every one of your customers boosted their orders to record levels, propelling your company to profits and a stock valuation you've never seen before and may never see again.

    And of course all these CEOs cashed out a huge chunk of their stock options, in some cases tens of millions of dollars worth, while Rome was burning.

    I'm still trying to figure out what's so surprising about all of this.