SAN JOSE, Calif. -April 16, 2001 - Cisco Systems, the worldwide leader in networking for the Internet, today provided a business and financial update and summarized recent actions it has taken to address current business conditions.
Due to continued global economic challenges, the slowdown in the global telecom market, and the deceleration in corporate IT spending, Cisco expects revenue for its fiscal third quarter to be down approximately 30 percent sequentially from fiscal second quarter, which was $6.7 billion. The Company expects to be profitable for the third quarter, with pro-forma earnings per share expected to be in the very low, single-digit range. As global economies and capital spending inevitably turn around, the Company's long-term expectations for its segment of the IT industry remain at 30 to 50 percent growth per year.
"The business environment that our segment of the IT industry is facing has never been more challenging," said John Chambers, president and CEO. "In fact, this may be the fastest any industry our size has ever decelerated, which has required us to make difficult business decisions at an unprecedented speed. During this time we have not changed our long-term vision and business strategy for the next three to five years, realizing there will be periods of growth in our industry segment both above and below expected levels.
"Personally, of all the difficult decisions we've had to make, the toughest was the reductions in
headcount," said Chambers. Cisco expects to take a restructuring charge of approximately $800
million to $1.2 billion during the fiscal third quarter, associated with the restructuring of certain
areas of Cisco's business. This charge comprises the following three components:
- Workforce reduction charge-Cisco is reducing its workforce by approximately 8500
people, which includes 2500 temporary and contract workers. Cisco expects to take a
one-time charge of approximately $300 to 400 million this quarter related to this reduction in
workforce. When the reduction in headcount is fully implemented, Cisco believes these
actions will reduce its overall cost structure by approximately $1 billion on an annualized
basis. Initial savings will begin during the fiscal fourth quarter of 2001. - Consolidation of excess facilities and related fixed assets charge-Due to the workforce reduction and restructuring of certain businesses, Cisco expects to consolidate its workforce into designated facilities, resulting in an excess facilities charge of approximately $300 to $500 million.
- Asset impairment charge-The restructuring of certain businesses will also result in a charge relating to the impairment of assets, primarily goodwill, of approximately $200 to $300 million.
"Business demand consistently exceeded our expectations throughout most of calendar year 2000,"
said Larry Carter, chief financial officer. "And in an effort to meet our customer expectations we
continued to increase our inventory and capacities to keep up with rising demand. This charge
reflects the recent significant and unexpected drop in customer demand." Cisco's inventory
balance, at the end of the third quarter of fiscal year 2001, is expected to be approximately $1.6
billion after this charge. The Company believes that inventory turns will increase, eventually moving
back to its stated goal of seven to eight by the beginning of the next calendar year, assuming the
economic challenges are reasonably resolved.
Excluding the charge, Cisco expects its fiscal third quarter pro forma gross margin will be in the
low to mid 50 percent range. The near-term decline in pro forma gross margin relates to continued
overhead costs combined with lower shipment volumes.
Cisco continues to see capital spending and macro-economic challenges expanding into other
regions of the world. The United States continues to be challenging, especially in the enterprise and
service provider areas of business. In Asia Pacific, Cisco is seeing weakness in Korea, Taiwan,
Australia, and Japan. In Europe, Cisco is also experiencing weakness, primarily in the service
provider market and in segments of the enterprise business.
The Company currently expects its fiscal fourth quarter revenue will range from flat to down 10
percent sequentially. Cisco stated that visibility going forward is more difficult in the current
business climate and is subject to more variability than normal.
"As we saw the business conditions evolving, we took the appropriate steps to implement and
communicate what we believe to be very thoughtful modifications in the short run, while aligned to
our long-term strategy," said Chambers. "We remain very confident in our long-term growth
opportunities and believe our breakaway strategy positions Cisco to continue to lead our industry."
Cisco plans to report its fiscal year 2001 third quarter results on May 8, 2001 at 1:45 p.m. Pacific
Time.
About the Conference Call
Cisco will provide a business and financial update and will summarize recent actions the Company
has taken in a conference call today beginning at 2:00 p.m. Pacific Time. To listen to the call, U.S.
callers may dial 800-857-9819; and international callers may dial 212-547-0239. An audio
version of the conference call is available from April 16 through May 7 on Cisco System's Web
site at www.cisco.com/go/investors>. A playback of the conference call is available on April 16 at
4:30 p.m. Pacific Time at 800-839-9131 for U.S. callers and 402-998-0952 for international
callers. To request a press release to be faxed to you, please call 408-526-8890.
