Channel Marker

Nov 5 2008   6:39PM GMT

Cisco predicts sales to drop in Q2; will ride out storm with hiring freeze

rivkalittle Rivka Little Profile: rivkalittle

Cisco CEO John Chambers said Wednesday afternoon during a Q1 earnings call that he expects sales to fall 5 to 10% in the second quarter and that the company will go on a $1 billion cost cutting campaign, halting hiring as one of many maneuvers. The good news is that Chambers didn’t lower long term growth predictions of 12 to 17%.

Q1 net income was flat at $2.2 billion, or 37 cents a share, almost the same as last year’s Q1 income of $2.21 billion or 35 cents a share.

But order growth is down. In the U.S. there was an 8% drop in orders during the period, and the U.K. saw a double digit decline. Overall, in August, Cisco saw a 7% increase in orders, while in October there was a 9% decrease.

“The environment has changed dramatically over the last two months with the financial crisis,” Chambers said. He added that it is difficult to make a forecast “given dramatic variability.”

“We are going to assume what we saw in October will continue into next quarter,” Chambers said. It was with that in mind that Chambers predicted the 5 to 10% decrease in revenues.

In previous earnings calls, Chambers had said business was hurting in the U.S. and Europe but remained strong in emerging markets and Asia. During Wednesday’s call he confirmed that effects from the downturn and credit crisis had spread to almost every market touched by Cisco’s many tentacles. In almost every market, Chambers said enterprise sales were hurting more than service provider and consumer sales.

“It is the second most difficult time in my career in terms of the forecast,” Chambers said. Cisco’s business suffered seriously after dot-com bubble burst in 2000.

While Cisco will make a number of cost cutting moves, including the hiring freeze and slashing travel, it will continue to invest in technologies like collaboration and virtualization, Chambers said. Much of that investment, he said, would focus on the U.S. and emerging markets. And though Chambers said it is unclear when this downturn will end, he expects, “the U.S. will be the first country to recover.”

He also said that the company would use the downturn as a time to strengthen relationships with customers and to make sure it has the technologies in place to be in the lead when an economic upturn begins.

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