Cisco Dashes Hope for Tech Turnaround

Cisco slashes its sales forecast as the global economic slowdown continues to spread.
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Cisco

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slashed its sales forecast as the global economic slowdown continues to spread.

On an earnings conference call CEO John Chambers said the expanding economic slump has been a challenging environment for most of Cisco's customers.

Orders in the fiscal second quarter fell 14% and worsened as the quarter progressed, Chambers said. The order to shipment rate or book-to-bill ratio fell below one in the quarter, a common indicator that sales momentum is slowing.

Chambers said he now expects sales for the fiscal third quarter to be down 15% to 20% compared to year-ago levels. This puts projected revenue at roughly $8.1 billion, well below analysts' expectations for sales of $8.7 billion.

After saying the downturn is "the biggest challenge of our lifetime," CEO John Chambers emphasized that it was also the biggest opportunity to prepare the company for the eventual upturn in business.

The comments came after the San Jose, Calif., networking gearmaker posted

earnings

, excluding one-time items, of 32 cents a share, compared to 38 cents a share in the year-ago quarter and analysts' expectations for pro forma profit of 30 cents, according to Yahoo! Finance.

Sales for the second quarter ended last month were $9.1 billion, down from $9.8 billion a year ago and just above analysts' targets of $9 billion.

"Cisco showcased solid financial strength during a period of significant economic challenge," said CEO John Chambers in a press release.

Tech investors see Cisco, with its broad global reach and roster of customers from big businesses to telcos, as having a good view on the health of IT spending. The credit crises and sluggish economy have added to concerns that orders for new equipment will continue to dry up.

Leading into Cisco's earnings report, some analyst have been bracing for a much

longer tech winter

than some had hoped for. New rounds of spending cuts by telcos and companies all across the commercial sector didn't necessarily bode well for big networking equipment investments.

Cisco is expected to give its outlook for the April quarter. Analysts expect an adjusted profit of 29 cents a share on a 3% sequential dip in revenue to $8.71 billion.

In the press release, Cisco hinted that cost cuts would continue, but not in a dramatic fashion. Through efforts including travel limits and a hiring freeze, Cisco says it has cut its discretionary expenses 15% in the most recent quarter. Looking ahead, Cisco expects it may discontinue some projects which could lead to some employee cuts, though no details were provided.

The company generated $3.2 billion in cash in the quarter adding to its $29 billion stash. On gross margin, it expects to shrink to 63% from the current 65% range.

"We remain comfortable with our long-term vision and strategy as we move into new market adjacencies and prioritize our existing opportunities. We intend to accelerate the alignment of our resources to prioritize future growth opportunities, gradually decrease our operating expenses," Chambers said in the release.

Cisco shares rose briefly about 2% in after-hours trading Wednesday and later fell 4% as Chambers lowered the sales target for the April quarter.