Cisco Plans to Cut 4,000 Jobs Starting This Quarter
Word of the cuts came on a conference call with analysts along with the forward-looking guidance for the quarter ending in October. It said it expects to earn 50 cents to 52 cents on sales that will grow between five percent and seven percent. That’s about in line with the 51 cents the Street had expected.
CFO Frank Calderoni said the company expects to take a charge of about $550 million on a pre-tax basis to cover the restructuring costs, and most of that will be done during the first quarter. Cisco is calling the move a “workforce rebalancing.” CEO John Chambers said on the same call that the company is seeing a slow and steady economic recovery, consistent with what was seen last quarter, but “not at the pace we want.”
The cuts will amount to about five percent of Cisco’s overall workforce. It would be Cisco’s second round of layoffs this year. In March the company cut 500.
Last July it cut 1,300, about two percent of its headcount at the time.
This cut is closer in scale to the big one Cisco made two years ago, when it said it would cut 6,500 people from its payroll. CEO John Chambers has repeatedly said that Cisco’s restructuring, which began in earnest in 2011, would be an ongoing process. It’s starting to look like layoff announcements are going to be a regular feature of the summer quarter.
Cisco shares are down more than nine percent in after-hours trading on the heels of an earnings report that was weaker than expected.
Sales were up about five percent in Cisco’s main business, Internet switching, which accounted for $3.8 billion or about 30 percent of sales. Service provider video, which at $2.1 billion accounted for about 17 percent of sales, grew 23 percent and was driven by the acquisition of Israel’s NDS last year. Sales of wireless networking equipment grew 32 percent, propelled in part by its $1.2 billion acquisition of Meraki last year. Cisco’s data center business grew 43 percent, but those are both much smaller segments as percentage of the total.
I’m expecting to talk to CEO John Chambers shortly and will have more on the announcement. This is where I usually pick a song that follows the tone of Cisco’s earnings report. It’s a funny (or in this case not so funny) tradition that I started a few years ago, and Chambers always asks about it. I don’t think he’s going to like my choice this quarter, but it was obvious: Bryan Adams’ “Cuts Like a Knife” says about all there is to say this time around.
Update: I just got off the phone with Chambers. Naturally, I asked him about the reasoning behind the cuts. “The primary reason is that as a company we’re rebalancing our work force to meet the opportunities,” he said. It’s not a matter of cutting expenses company-wide, but cutting here and adding there, where the business is generally stronger. It’s the kind of realignment that would normally happen over the course of two years naturally via attrition and retirements and other changes, he told me, but two years isn’t fast enough, so a one-time cut is necessary.
As usual, Cisco is a bit of a canary in the coalmine indicating the health of the global economy, often well ahead of the point at which it’s apparent to other companies. This quarter the data is going in a lot of confusing directions, Chambers said. “We’re happy with our public sector business in the U.S., but the enterprise business in Europe is sliding, and business in Asia Pacific was weak.” Also, U.S. commercial and enterprise sales were strong, but of the top five customers only two grew in a meaningful way, he said. “The data is very inconsistent.”
I also just got a comment from analyst Patrick Moorhead of MoorInsights and Strategy. He said that Cisco is struggling with a big shift in the networking business: “Massive, scale-out data centers aren’t buying into Cisco’s heavy-duty management feature sets, and are instead buying stripped-down gear out of Asia at much lower prices. Enterprises are also increasingly looking for more open or converged solutions, areas where Cisco is disadvantaged compared to Hewlett-Packard and IBM.”
Maybe so, but Cisco’s still making a strong play for selling a combined stack into the data center. Long known just for networking gear, it’s now the number two vendor of x86-based blade servers after HP itself. That’s okay because HP, which leads the market for blade servers, is the number two vendor of enterprise networking gear after Cisco.