Cisco feels sting of economic downturn

Technology bellwether Cisco Systems gave a glum outlook Wednesday as the company sharply felt the effects of the financial crisis and weakening economy during its first fiscal quarter 2009.

Cisco's CEO John Chambers told analysts and investors on a conference call after it announced its earnings that the company saw a dramatic drop in enterprise sales during the last two months of the quarter, as its customers reigned back spending in light of the financial crisis and uncertain economy.

Chambers said the downturn, which the company first saw among U.S. customers, has now spread to customers in Western Europe as well as developing markets and Asia. In the U.S., sales were down 8 percent compared to a year ago. Sales to large companies, Cisco's bread and butter customers, were down a whopping 11 percent compared to the first fiscal quarter of 2007.

Chambers also said the company saw a stark contrast in spending from August to October, when the financial crisis on Wall Street was in full bloom.

"August felt very good," he said. "September wasn't too bad. But October did slow quite a bit."

Chambers said he expects sales to continue to be slow over the next quarter, and he predicted that Cisco's revenue would dip 5 percent to 10 percent during the next quarter.

In spite of the dismal outlook, Chambers tried to reassure investors that the company, which makes routers that power the Internet, is well positioned to weather the storm. He said the company already has its "playbook" out and is preparing for the slowdown. He also noted that during the past five or six economic downturns, Cisco has always managed to emerge a stronger and better positioned company than before the downturn.

"While we all wish we didn't have to face these challenges , it's during these times that we have become stronger versus our peers," he said. "We also believe we are very well positioned, as we enter the next phase of the Internet."

Chambers said the company expects to grow even stronger once the economy rebounds. But in order to make sure it can stay viable during the downturn, Chambers said the company will have to cut about $1 billion from its spending budget. It will do this mainly by cutting costs, such as travel for its more than 67,000 employees. In mid-October it also instituted a hiring "pause."

But Chambers also emphasized that Cisco will continue to invest in new markets so that when the economy turns around, the company is ready to take advantage of increased spending. Top on the list of areas to invest in are Web 2.0 and collaboration technologies, data center technology, and video. Chambers also said he doesn't believe the economic downturn will last long.

"We wouldn't be investing as heavily as we are, if we thought the downturn would be long in duration," he said. "The next 45 days will tell us a lot."

Despite the bad news, Cisco still managed to hit analyst expectations for the quarter. The company said its sales were up 8 percent to $10.3 billion from $9.6 billion during the same quarter a year ago. This growth was in line with the company's forecast and it matched expectations from analysts.

But even as sales rose, Cisco's net profit for the quarter stayed relatively flat at $2.2 billion or 37 cents a share compared with $2.2 billion, or 35 cents a share a year ago.