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Cisco slashes guidance and freezes hiring

The Internet gearmaker beat estimates but saw orders drop steeply in October.

By Scott Moritz, writer
Last Updated: November 6, 2008: 11:35 AM ET

NEW YORK (Fortune) -- Even market pessimists were surprised by Cisco's warning of a huge sales shortfall.

The San Jose-based giant, a bellwether for the tech industry, said late Wednesday that it has stopped hiring and slashed its revenue target for the current quarter ending in January to about $9.1 billion, or 12% below analysts expectations.

Many analysts had cut their January quarter estimates ahead of Wednesday's earnings report, but few anticipated the severity of the dive.

On a conference call with analysts, Cisco's (CSCO, Fortune 500) CEO John Chambers said customer orders in October fell 3% compared to year-ago levels as September's sudden slowdown in demand continued.

"It went from bad to worse during October as the problems in the U.S. spread everywhere," RBC analyst Mark Sue wrote in a research note Thursday.

Cisco said it plans to cut $1 billion out of its total operating expenses through what it calls "involuntary attrition" and other measures.

Cisco shares fell more than 2% in early trading Thursday. The Dow Jones Industrial Average was down 1%.

For the first quarter ended Oct. 25, Cisco posted an adjusted profit of $2.5 billion, or 42 cents a share, two cents better than the year-ago period and three cents above analyst estimates. Sales were $10.3 billion, up from the $9.5 billion last year and in line with estimates tallied by Thomson First Call.

Looking ahead, investors and analysts expected Cisco to guide sales growth down by about half of its previous 8.5% growth projection for the current quarter. But Cisco's outlook was even more dire than that. And similar to its large tech peers like Intel (INTC, Fortune 500), Apple (AAPL, Fortune 500) and Microsoft (MSFT, Fortune 500), Cisco's downward revisions fed concerns that the economy is headed into a recession.

Chambers says the U.S. slowdown has spread to Cisco's European and Asian operations. Even so, he said the company will keep its long-term annual growth forecast in a range between 12% and 17%

Signs of a economic slowdown aren't hard to find. The unanswerable question is how painful it will be and how long it will last.

If investors are any gauge, market optimism has all but vanished. Cisco shares hit a five-year low of $15.90 last week. The stock is down about 33% for the year. To top of page

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