Arik Hesseldahl

Recent Posts by Arik Hesseldahl

“Painful But Necessary”: Analysts Comment on Cisco’s Cuts

As of the end of its most recent quarter, Cisco Systems had 73,408 employees. By the time the various employee retirements, cuts and asset sales announced yesterday are completed, it will have fewer than 62,000.

Of those leaving the company, 2,100 are taking a voluntary retirement buyout package that’s been made available to people whose age and years of service add up to a sum of 50 60. For example, an employee 40 50 years old with 10 years at Cisco would be eligible. An additional 4,400 will lose their jobs outright, but will no doubt receive severance packages. The remaining 5,000 or so are employees of a Cisco plant in Mexico that is being sold to Foxconn, the Taiwanese contract manufacturer. They will become Foxconn employees.

These reductions are the third significant step in what’s expected to be a four-step process, spearheaded by CEO John Chambers, to get Cisco on a leaner, more competitive and more profitable path. Analysts are, so far, fairly positive on the cuts.

Brian Marshall of Gleacher & Co. in San Francisco, who last week predicted that Cisco would cut 5,000, gave a tentative thumbs-up to the move. Cisco’s goal throughout the process has been to take out $1 billion in annual operating costs. Marshall says that it looks like Cisco could do better than that: He thinks the cuts could yield $1.7 billion in savings and add 25 cents in per-share earnings to the bottom line in 2012.

Breaking it down, he says the 6,500 jobs cut could result in $1.3 billion in savings from retirements and firings, assuming a cost of about $200,000 per head. The sale of the facility in Mexico will yield about $400 million in reduced cost of goods sold (COGS).

The next step, which Marshall expects in September, will be for Cisco to recalibrate its long-term financial expectations. Long accustomed to telling Wall Street to expect in the 12 to 17 percent range, the more realistic range for Cisco, Marshall says, is now closer to 10 percent, plus or minus a few points. Gross margin expectations will have to come down, too, to about 25 percent, down from a range of 28 to 31 percent.

Shaw Wu of Sterne Agee in San Francisco called the reductions “painful but necessary.” He notes that Silicon Valley hiring has been pretty strong of late and that those Cisco folks losing their jobs should have little trouble finding work at companies like Facebook, Apple or Google, though I’d suggest that Hewlett-Packard’s up-and-coming networking unit or Juniper will be eager to pick up some Cisco talent.

On the sale of the factory to Foxconn, Wu sees Cisco as winding up for a spin-off of the set-top box business. “We view the Foxconn transaction as effectively a restructuring of its lower margin set-top box business and think ironically, could make a potential future spin-off easier with the manufacturing detached.”

Update: A few of you have written to say my initial characterization of the retirement package terms was incorrect. The required sum of age plus years of service is 60, not 50. Sorry about that.

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There was a worry before I started this that I was going to burn every bridge I had. But I realize now that there are some bridges that are worth burning.

— Valleywag editor Sam Biddle