Cisco Systems has announced a profit warning for its third quarter as sales of networking equipment to businesses and telecommunications carriers continue to slump.
Executives say the economic slowdown has begun to spread to parts of Asia and Europe.
In addition, the company announced a variety of charges that could total as much as US$3.7 billion.
Cisco expects third-quarter earnings per share to be in the low single-digit range and for revenue to fall 30 percent from the second quarter, when the company earned US$6.7 billion in sales.
It expects fourth-quarter revenue to range from flat to down 10 percent sequentially as the US economic slowdown has begun to spread to parts of Asia and Europe, executives said.
"The business environment that our segment of the IT industry is facing has never been more challenging," Cisco Chief Executive John Chambers said in a statement. "In fact, this may be the fastest any industry our size has ever decelerated."
More charges
Cisco executives said the company expects to take a restructuring charge of US$800 million to US$1.2 billion as part of a company-wide reorganisation that includes previously announced layoffs of about 8,500 employees and the restructuring of certain businesses.
The company will take an additional US$2.5 billion charge based on excess inventory, mostly raw materials and components that the company uses to build networking products.
The layoff of 8,500 employees, or about 18 percent, includes about 2,500 temporary and contract workers and is expected to save about US$1 billion yearly. In a previous announcement, the company said it expected layoffs of 3,000 to 5,000 full-time workers and between 2,500 and 3,000 temporary and contract workers.
This latest layoff announcement includes 500 new job cuts. To further cut costs, the company will consolidate facilities to save US$300 million to US$500 million.
The restructuring of businesses may include killing off some products that aren't selling well or that aren't profitable, such as digital subscriber line (DSL) equipment. The company earlier this month discontinued an optical router that was selling well.
Taking the world by storm
Cisco executives said the economic slowdown that has hit the United States has spread globally. Sales in Asia and Europe were weak in the third quarter, Chambers said. In the United States, business sales were down 20 percent sequentially, while sales to service providers were down about 40 percent sequentially.
Long term, however, Cisco executives still believe the company will reach 30 percent to 50 percent revenue growth once the economy turns around.
"It's the price of success," said one analyst. "Everything Cisco has done to become such a fantastically great company has led to the problems they face now."
Like others in the technology sector, networking companies have been hit hard in recent months by the economic slowdown. Nortel, Lucent, 3Com, Sycamore Networks, Extreme and others have all announced earnings warnings.
