Cisco Plans to Cut 5,500 Workers -- 2nd Update
August 17 2016 - 07:20PM
Dow Jones News
By Don Clark
Cisco Systems Inc. is cutting 5,500 employees -- 7% of its
workforce -- in the networking company's latest reaction to market
shifts, including customers favoring software over hardware.
The reduction beginning this quarter renews a pattern of
midsummer moves to shed costs and make room to hire employees with
new talents.
The job cuts, disclosed with its fiscal fourth-quarter financial
results, mark the most dramatic move yet by Chief Executive Chuck
Robbins, who a year ago assumed a position held for two decades by
John Chambers, who remains the company's chairman.
The San Jose, Calif.-based company said it would reinvest the
savings from the job cuts into businesses that it expects to grow,
including its own software and service offerings. Cisco said it
plans to record pretax charges of up to $700 million for severance
and termination benefits.
Cisco has long held a dominant share of sales of the routing and
switching equipment used to funnel data over the internet and
between computers in data centers. Though the company has
diversified its business significantly, those two hardware
categories remain its largest sources of revenue, and their sales
have been slowing lately.
On Wednesday, Cisco said fourth-quarter switching revenue rose
2%, while revenue in its routing business fell 6%. In the prior
quarter, revenue fell in both businesses.
Over all, Cisco said its fiscal fourth-quarter profit rose 21%
on a 1.6% revenue drop as the company tightened expenses in a
variety of areas. Shares of the company fell 1% to $30.31 in
after-hours trading.
Profit climbed to $2.81 billion, or 56 cents a share, from $2.32
billion, or 45 cents a share in the same period a year earlier.
Revenue fell to $12.64 billion from $12.84 billion.
The company projected revenue in the current quarter would be
flat plus or minus 1%, compared with the year-ago period. It
predicted adjusted earnings per share of between 58 cents and 60
cents. Analysts expect revenue to fall 2% and adjusted earnings of
60 cents.
"We continued to manage our business well," Mr. Robbins said on
a conference call, despite what he called an uncertain economic
environment.
Revenue from telecom carriers and other service providers
declined 5%, turning negative after three consecutive quarters of
growth, he said.
Cisco and other hardware vendors have been hurt by changes at
such customers, which have been struggling to pare costs while
handling steadily increasing data traffic. In many cases, they are
adopting a combination of networking software and less-expensive
boxes running standard Intel Corp. microprocessor chips instead of
special-purpose hardware that is Cisco's specialty.
One poster child for the trend is AT&T Inc., which has been
promoting software-based approaches that it says can allow the
carrier to deploy services and respond to market changes faster
than using standard hardware. John Donovan, its chief strategy
officer and group president, appeared on stage in San Francisco
Wednesday with Diane Bryant, an Intel executive vice president, to
discuss plans to broaden the companies' technical
collaboration.
The software-based approach in the future "won't be an
afterthought," Mr. Donovan said. "It will be the fabric."
Cisco has acknowledged the trend and now allows customers to
more easily program its hardware, an approach the company said has
taken hold. But that software only works on Cisco equipment; many
backers of what the industry calls software-defined networking
favor programs that can work on equipment from multiple
vendors.
The company also has been working on more offerings delivered as
services, including forms of conferencing and collaboration and
security offerings.
Analysts note that hardware companies that make such changes can
ultimately become more profitable and develop recurring sources of
revenue. But turmoil tends to result in the short term, as
equipment sales slow and companies require different talents from
employees. "It is a tectonic shift for a company of that type,"
said Glenn O'Donnell, an analyst at Forrester Research. "But it's
also necessary."
Cisco has frequently used the start of new fiscal years in
August to announce job reductions. In August 2014, for example, Mr.
Chambers announced plans to shed about 6,000 employees, or 8% of
its workforce at the time. The prior year, the cuts totaled 4,000
jobs, or 5% of its workforce.
Cisco's cuts follow similar moves by other mature tech
companies. Intel, for example, announced plans to trim 12,000 jobs
in April, and International Business Machines Corp. in May laid off
an undisclosed number of employees.
Write to Don Clark at don.clark@wsj.com
(END) Dow Jones Newswires
August 17, 2016 19:05 ET (23:05 GMT)
Copyright (c) 2016 Dow Jones & Company, Inc.
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