Nov. 5 (Bloomberg) -- Cisco Systems Inc., the world's largest maker of networking equipment, said first-quarter sales rose at the slowest pace in three years and revenue this quarter will drop as the slumping economy crimps customers' budgets.

Second-quarter sales will decline as much as 10 percent from a year earlier, Chief Executive Officer John Chambers said today on a conference call. The shares sank in late trading.

``It is the second most difficult time in my career in terms of the forecast,'' Chambers said. Cisco sales also slumped after the dot-com bubble burst in 2000.

The economic challenges faced by Cisco's U.S. financial customers have now expanded to Europe and Asia, said Chambers, who plans to cut expenses such as employee travel by $1 billion over the next three quarters. Revenue in the period ended Oct. 25 climbed 8.1 percent to $10.3 billion, in line with estimates, as customers clamped down because of the credit crisis.

``The overall tone of business especially in October was so poor,'' said Chuck Heath, an analyst at UMB Investment Advisors in Kansas City, Missouri. UMB owns about 760,000 Cisco shares among $11 billion under management. ``They are clearly seeing that business is deteriorating in the current environment,'' said Heath, who recommends buying Cisco shares.

Cisco, based in San Jose, California, fell 6 percent in extended trading to $16.35 after dropping 94 cents to $17.39 in regular Nasdaq Stock Market trading. The shares have declined 36 percent this year.

Industry Barometer

Investors view Cisco as a technology industry barometer because it dominates the market for routers and switches, which direct and control the flow of data over networks.

The company's customers are in the dark about an economic recovery, Chambers said in an interview. ``They honestly don't know.''

The U.S. economy probably will contract for a second- straight period in the fourth quarter, according to economists in a Bloomberg survey.

Chambers, 59, plans to reduce expenses by stemming hiring and business travel. He'll also rely on his Cisco Capital unit to continue lending to customers and distributors as outside credit tightens.

First-quarter net income was little changed at $2.2 billion, or 37 cents a share, from $2.21 billion, or 35 cents, a year earlier, Cisco said today in a statement. Excluding stock-based compensation, profit of 42 cents a share compared with the 39- cent average estimate in a Bloomberg survey.

Geographic Breakdown

U.S. orders in the period dropped 8 percent from a year earlier. The U.K. had a double-digit decline, while the Asia- Pacific region saw a 4 percent drop, Chambers said. One bright spot was Japan, where bookings rose 20 percent, he said.

Switch sales climbed 8 percent to $3.6 billion. Router revenue advanced 1 percent to $1.9 billion. Sales in Cisco's advanced technologies unit, including video systems, gained 17 percent to $2.7 billion.

The company bought back 46 million shares in the quarter for about $1 billion. That helped boost net earnings per share by reducing the number of outstanding shares to 5.97 billion from 6.33 billion a year earlier.

The financial crisis may shave as much as 2 percent off Cisco's revenue because customers, primarily in emerging markets, won't be able to get credit, Ehud Gelblum, an analyst with JPMorgan Chase & Co. in New York, said in a report last month.

Cisco got about 11 percent of 2008 revenue from emerging markets, excluding China and India.

Gelblum, who has a neutral rating on Cisco, is the top-rated telecommunications equipment analyst by Institutional Investor magazine. He had estimated revenue growth in the current quarter of 1.8 percent to about $10 billion. Analysts in the Bloomberg survey had projected a 7.4 percent gain to $10.6 billion.

The company expects second-quarter sales in the range of $8.85 billion to $9.34 billion.

Cisco first warned of a slowdown about a year ago. Chambers said at the time he saw a ``dramatic'' drop in orders from customers in the automobile and financial industries.

To contact the reporter on this story: Vivek Shankar in San Francisco at vshankar3@bloomberg.net

Last Updated: November 5, 2008 19:57 EST