Last Updated: March 27, 2008: 4:55 PM EDT
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Cisco signals trouble ahead

Tech bellwether starts cutting costs, Fortune has learned, in a clear sign that it's not immune from a broader slowdown.

By Scott Moritz, writer

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(Fortune) -- Cisco Systems, one of the country's biggest technology companies, appears to be bracing for a downturn.

The San Jose maker of Internet networking gear has told some managers to limit travel expenses and use up accumulated vacation days, according to sources close to the company. Both steps could be early signs that deeper cutbacks loom.

The belt-tightening is a jarring new turn for Cisco (CSCO, Fortune 500), which crashed hard when the technology bubble burst earlier this decade but has since rebounded on a major push into video and rising worldwide demand for Internet routers. It's also an ominous sign that the U.S. technology industry is facing a slowdown as key customers brace for a recession.

On Wednesday, business-software giant Oracle (ORCL, Fortune 500) said third-quarter sales missed analysts' estimates. Last week Sony Ericsson, the No. 4 handset maker, warned of a steep profit shortfall. And on Thursday, a new report indicated that Google (GOOG, Fortune 500) is seeing a slowdown in its core search ad business.

A Cisco slump would be especially troubling. Until earlier this year, Cisco global scope allowed it to sidestep the slumping demand for information technology equipment among big U.S. businesses. But Cisco analysts and investors say the spending slowdown is now spreading to other markets like Europe.

After cutting sales growth targets to 10% from 15% last month and warning that January orders were "challenging," CEO John Chambers has been circumspect in his business outlook of late. In a presentation to investors March 4, Chambers said the current quarter ending in April has "evolved, unfortunately, very much as we anticipated" and that the current slowdown could last from two to five quarters.

Wall Street took the comments as a sign that business wasn't getting worse for Cisco, but some investors weren't convinced. With the trouble at Citigroup (C, Fortune 500) and other major Wall Street banks pulling down the financial sector and the overall weakening of the U.S. economy, Cisco investors have grown jittery. The stock is down 29% from its 52-week high of $34.24 in November.

"There's a willful ignorance out there among people who think that Cisco won't be affected by an economic downturn," says one money manager who is expecting the company to turn in a disappointing performance this quarter.

A Cisco representative declined to comment on the travel and vacation memo, but wrote in an e-mail that the company "constantly reviews ways to streamline and optimize business processes for improved efficiency and increased shareholder value. We are going to be aggressive, which means we may prioritize in some areas of expense in order to be aggressive in others," the spokesperson continued.

If January was challenging, February was likely to be even more so, say analysts and investors. And the fact that Cisco is looking to cut costs should not be viewed as a sign that the worst is over.

Analysts say the company has trimmed its staff in a few places and is considering additional bigger cuts if warranted. Cisco hasn't had massive layoffs since the collapse of the Internet bubble, so any major cuts are likely to draw renewed parallels.  To top of page

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