More Bad News From Cisco

NEW YORK -- April 17, 2000, 5:57 AM ET -- We're in peak earnings season and we knew heading into it that it was not going to be pretty.

Intel reported first-quarter profits today that were down more than 60 percent from last year. Texas Instruments also reported, and earnings at the leading maker of computer chips for mobile phones were off 17 percent from the same period a year ago.

And layoffs were announced today. More jobs were eliminated at Eastman Kodak, where profits declined by 48 percent.

But Topic No. 1 today on Wall Street was an unusually dire profit warning from technology giant Cisco Systems. The company that stood as a symbol of the Internet's rapid growth and stock market riches is now a symbol of its stunning decline.

"From 1997 to mid-2000, it was the stock that could do no wrong and it put up quarter after quarter of ever-improving revenue growth," said Paul Sagawa, an analyst with Sanford C. Bernstein. "So when the inevitable down cycle comes, it's all the more wrenching."

Locomotives That Carry Internet's Freight

For a time, Cisco was the world's most valuable company. It became a titan by making the equipment that carries e-mail, video files and other data over the Internet. Its routers and switchers are essentially the locomotives that carry freight around the Internet's railways.

Last year, Cisco couldn't make these routers and switchers fast enough. Now, as companies have slashed their spending on the Internet, Cisco finds itself with $2.5 billion worth of inventory it expects to become outdated before it ever can be sold.

"This may be the fastest any industry our size has ever decelerated," Cisco CEO John Chambers said in a written statement.

In an understatement, Cisco Vice President Ron Ricci told ABCNEWS that "the speed bumps in the investments that companies are making in the Internet are a little bit larger than we thought."

Cisco's stock is down about 80 percent from its high. The San Jose, Calif., company plans to lay off 8,500 workers. Its new corporate campus outside Dallas is on hold. And the company expects sales and profits next quarter to be even worse.

Investors who believed Cisco was different from other New Economy companies have lost $400 billion learning it is not.

"There was a feeling if there was ever going to be a shakeout in technology, Cisco would weather the storm much better than any of the other stocks," said Jeremy Siegel, a professor at the Wharton School of Finance.

The good news today is that this bad news did not send the market into a tailspin. Perhaps that's because it was largely expected.