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Cisco Warning Sobers Street

Investors in the past few days have been feeling overly optimistic, if not quite giddy, that the yearlong slump in stock prices is just about over.

Then along came Mr. Gloomy Gus, John Chambers.

The Cisco Systems CEO delivered a sobering message after Monday's market close, one which should remind investors that the slowdown in corporate and consumer spending currently gripping the economy can't simply be wished away or ignored.

Announcing that the networking equipment giant would miss revenue and profit projections for its fiscal third quarter, Chambers offered this pessimistic prognosis: "The business environment that our segment of the IT industry is facing has never been more challenging. In fact, this may be the fastest any industry our size has ever decelerated."

That sure doesn't sound like prosperity is right around the corner. And if the after-market reaction is any indication, Chambers' message could help erase the recent gains made by Internet and tech stocks in particular. Cisco shares fell after Monday's closing bell, dragging down shares of other networking companies such as arch-rival Juniper Networks , Avici Systems , Ciena and Extreme Networks .

Shares of CSCO closed Monday at $17.20, but dropped to $15.25 in Tuesday's pre-opening trading. CSCO hit its lowest closing price in more than two years on April 6, finishing at $13.63.

Cisco estimated Monday that for the third quarter ending April 30, revenues would be 30% lower than in Q2 and that per-share earnings would be in the "very low, single-digit range." Analysts had expected an EPS of 8 cents.

The company said it would take a write-off of $2.5 billion for excess inventory in the third quarter.

Noting that reductions in corporate spending had spread from the U.S. to global markets, Cisco also predicted that Q4 revenues could drop as much as 10% below third-quarter sales.

The current quarter will be the second straight in which Cisco falls short of previous expectations. Until this year, the company had met or exceeded Wall Street estimates for as long as anyone could remember. But in February, Cisco missed earnings forecasts by a penny, and warned at the time that quarterly sales would be flat for the rest of the fiscal year. Now CSCO is downwardly adjusting even that modest outlook.

While analysts seem split about the impact of Cisco's Q3 warning on the market -- some say it was expected, others say it was worse than previously thought -- it's hard to imagine investors shrugging off this high-profile reminder that the economic slowdown shows no sign of abating in the foreseeable future. And that's a shaky platform on which to build a sustained market recovery.



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