Cisco Taking $3 Billion in Charges

The other shoe dropped on the networking sector Monday, as Cisco (CSCO - Cramer's Take - Stockpickr) warned of a sharp third-quarter earnings shortfall and set more than $3 billion in charges to restructure its business and write off unsold gear. Its shares dropped 10% in after-hours trading.

The networker said third-quarter revenue would drop 30% from second-quarter levels, putting it short of $5 billion. The company had earlier forecast flat revenue for the period, a target that itself represented a sharp pullback from earlier guidance. Earnings will be in the "very low single digit" range, Cisco said; analysts surveyed by Thomson Financial/First Call expected the San Jose, Calif., company to make 8 cents a share on revenue of $5.95 billion. As TheStreet.com recently reported, Wall Street has been pulling back its numbers in anticipation of just such a jarring admission from the onetime highflier.

Cisco also forecast a fourth-quarter revenue shortfall, saying it now expects that number to be flat with or down 10% from the newly reduced third-quarter target. Cisco said visibility "is more difficult in the current business climate and is subject to more variability than normal," citing continued global economic challenges, the slowdown in the global telecom market and the deceleration in corporate IT spending for the shortfall.

Cisco said it expects to take an additional excess inventory charge of approximately $2.5 billion during its fiscal third quarter, and said it would cut 500 more jobs than it previously disclosed, putting the toll at 8,500. Cisco expects its inventory balance at the end of the quarter to be $1.6 billion after the charge.

In addition to the inventory charge, Cisco expects to take a charge of $800 million to $1.2 billion to close some plants, fire workers and write off goodwill associated with restructured businesses.

In after-hours trading on Instinet, Cisco was off $1.80 at $15.40.