Cisco braced for bleak times ahead

By MICHAEL FOREMAN

BRISBANE - Cisco Systems has warned that a sharp drop in revenue may be the beginning of a much deeper and longer downturn than the company originally expected.

At the networking giant's annual Networkers conference in Brisbane last week, Gordon Astles, senior vice-president of Asia Pacific operations, sought to explain the phenomenon that CEO John Chambers has described as possibly the "fastest deceleration any company had ever experienced."

The sales slowdown began in January and was reflected in Cisco's last quarterly results for the period to January 27. These showed the rate of revenue growth had fallen to 55 per cent compared with 70 per cent in the previous quarter.

Mr Astles said the company now believed the downturn, which continued through February and March and is expected to result in Cisco's first quarter of negative growth, will last for at least three quarters.

"We are trying not to get too depressed about it, but for us to forecast that the quarter we are currently in, Q3 fiscal 2001, is the first time we are going to have negative growth quarter over quarter since the company's inception in 1986, means something is happening out there."

Mr Astles said the United States' general economic problems were beginning to affect the communications industry and the dropoff for Cisco's competitors Lucent and Nortel had been "nothing short of tragic."

Several broadband service providers had failed in the US and a side-effect of the dotcom fallout was that traditional bricks-and-mortar companies had less competitive pressure to go on to the web.

"If eToys are out of business, the pressure is off Toys'R'Us and it is likely to cut back spending on IT."

While admitting the slowdown would be "a test of Cisco's long-vaunted ability to manage," Mr Astles said Cisco's cash reserves of $US20 billion ($50.1 billion) would give the company "more runway than most" to overcome its problems. Cisco would also show the same flexibility in a shrinking market that it had demonstrated in periods of rapid growth.

The manufacture of 18 of the company's 20 product lines was outsourced and 55 per cent of all products was shipped to customers "without being touched by Cisco hands."

Mr Astles also pointed out that Cisco's San Jose headquarters was a campus of 43 buildings, none of which was taller than five levels. "We're ready in the worst-case scenario to spin off and sublease buildings."

While he hoped Cisco would increase its market share as "customers tend to gravitate towards the largest companies in uncertain times," the company announced last month that it would cut between 3000 and 5000 fulltime jobs, or between 7 and 11 per cent of its worldwide employee base of 44,000.

Mr Astles said the scale of redundancies in Asia Pacific, where Cisco employs over 3000 people, had not been decided.

"We have figured out what the underlying demand is and so far it's stronger [in Asia Pacific] than I'd anticipated. We'll know before the end of this quarter but I expect it will be less in this region than the rest of the corporation."

In New Zealand, Cisco employs 27 fulltime staff and one contractor, who are evenly divided between its offices in Wellington and Auckland.

New Zealand country manager Tim Hemingway said Cisco had already trimmed contractors.

"There has been no major impact on the business in New Zealand that required that but when the call comes out from the US to trim our cost we have to follow that line."

Channel and marketing manager Suzanne Hansen said the company had experienced a quiet period between December and January but this was largely because of seasonal factors.

* Michael Foreman attended the Networkers conference in Brisbane as a guest of Cisco.