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Cisco Cuts Back

Cisco Systems (CSCO): Maintains 3 STARS (hold). S&P downgraded from 4 STARS (accumulate) earlier on Friday.

Analyst: Megan Graham-Hackett

Cisco issued a statement in line with earlier story (downgrade) outlining cost cutting measures. In addition to its

normal discretionary spending restraints, Cisco will cut

its temporary workforce by 2,500-3,000 out of a total of 4,000.

Regular employee headcount will be reduced by 3,000-5,000,

out of a total of 44,000, through normal attrition (both

voluntary and involuntary), which Cisco has regularly

referenced in the past. Cisco now believes the capital spending

slowdown could last longer than two quarters, which is reflected

in our recently reduced forecast.

Earlier Friday, S&P reduced Cisco's fiscal 2001 (July) EPS estimate to $0.63 from $0.70 on further worries about tech spending, given Intel's dramatically lower Q1 EPS guidance. Further sharp deceleration in demand heighten risks for lengthening of the tech downturn and its spread to regions outside the U.S. At 29 times S&P's fiscal 2002 (July) estimate of $0.72, Cisco warrants hold. Despite the uncertainty, the company is poised to take market share as recovery occurs.

Intel Corp. (INTC): Downgrades to 3 STARS (hold) from 4

STARS (accumulate)

Analyst: Megan Graham-Hackett

Intel sees revenue down 25% vs. Q4, vs. prior estimate of down 15%. The firm sees gross margin at 51%, 700 basis points below prior estimates. Intel notes the shortfall is not due to microprocessor business, but due to new weakness in communications chips, flash memories and server chips. Surprisingly, Intel says its microprocessor average selling prices and market share is unchanged and is keeping its $7.5 billion capital expenditures plan. S&P is cutting its Q1 estimate to $0.15 from $0.21, and cutting its 2001 estimate

to $0.82 from $1.15 on gross margin hit. At 40 times S&P's lower 2001 estimate, Intel warrants hold.

STMicroelectronics (STM): Downgrades to 3 STARS (hold) from 4 STARS (accumulate)

Analyst: Megan Graham-Hackett

A preannouncement from Intel Corp. highlighted the dramatic change in the supply/demand environment for flash memories and the market in which STMicroelectronic's recent guidance is held for healthy growth. S&P is reducing its 2001 EPS estimate to $1.54 from $1.90 to reflect lower revenues from flash memories and gross margin pressure from reduced volumes. At 24 times S&P's reduced 2001 EPS estimate, the company is fairly valued.

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