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Tuesday, 17 April, 2001, 09:23 GMT 10:23 UK
Q&A: What's gone wrong with Cisco?

Cisco Systems, the networking company which was once the high-flyer of the high-tech sector, has warned of a collapse in sales and profits. BBC News Online looks at what went wrong and why.

What does Cisco do?

Cisco is the leading supplier of network equipment, like switches and routers, to big private companies and telecoms firms.

Its equipment provides the devices that link company computer networks together, and allow data and voice traffic to travel through telephone networks.

And its technology is the key hardware in the development of the internet.

Through acquisitions, Cisco had been able to buy two companies a month, keeping it at the cutting edge of networking technology.

It is one of the largest employers in Silicon Valley, with its presence felt everywhere in San Jose, California, the centre of the high-tech industry.

Why does its profits warning matter?

Cisco was the pin-up of the new economy, with sales growing from $2bn to $20bn in five years, while its value on the stock market soared to $550bn last year - making it, for a short time, the most highly valued company in the world.

It had convinced investors that sales and profits could grow 30-40% each year.

Now the company has admitted that such forecasts are no longer realistic. It plans to sack 20% of its workforce and take a $4bn restructuring charge.

As Cisco is considered a well-managed, highly capitalised technology company, its problems show that the entire high-tech sector in the US, not just companies, is in serious trouble.

Cisco's shares have now plunged by some 80% since their high one year ago, and it is now worth less than $100bn.

What went wrong?

Cisco became a victim of its own success.

It sold much of its equipment to new start-up telecoms and internet companies, sometimes lending them the money to buy it.

Now many of these companies have run out of money, and have had to sell their equipment on the second-hand market, undercutting Cisco's prices.

Cisco has now built up a huge inventory of unsold goods.

Cisco does not manufacture most of its equipment itself, and it is proving difficult to cancel its contracts with its suppliers quickly enough.

What are the implications?

Cisco's announcement shows that the problems in the high-tech sector are more serious than previously thought.

The belief that high-tech industries were immune from the cyclical downturns in the economy has been shown to be false.

Any recovery is likely to depend on how fast the US economy pulls out of its recession, and when corporate profits recover.

And it also depends on how quickly companies decide they can afford to invest massively in information technology again.

How will other high-tech companies fare?

Cisco's retrenchment is just one in a series of problems that is hitting the high-tech and telecoms sectors around the world.

Rivals like Nortel Networks, Lucent and Ericsson, and customers like AT&T and BT, have all announced cutbacks.

Many of these companies will be announcing their results in the next few weeks.

But the consensus is that, if even Cisco is in such difficulties, its weaker rivals, who have more debt and fewer resources for research and development, will be even more seriously affected.

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