The financial report was the first since chairman and CEO John Chambers laid out a plan to streamline Cisco’s organization and renew its focus on core businesses such as routing and switching. In addition to disclosing the job cuts, Cisco said it was abandoning a standing goal of achieving year-over-year revenue gains between 12 per cent and 17 per cent each quarter.
Cisco has extended itself into too many businesses and faces growing competition on its home turf, especially in network switches, Chambers has warned. At the same time, the public sector, a particularly important market for Cisco, has been cutting spending in all parts of the world, he said on Wednesday.
Along with grim news about the third quarter ended April 30, with revenue up less than five per cent from a year earlier, Cisco estimated that revenue in the current quarter would be flat or up less than two per cent.
The job cuts are beginning with a recently announced early retirement program, said Gary Moore, the company’s newly appointed chief operating officer, who is directing a program to cut US$1 billion out of Cisco’s annual operating expenses over the next year.
“To be clear, we do anticipate a workforce reduction on a global basis, affecting both our full-time and contractor workforce,” Moore said. Cisco won’t say more until after employees are informed around the end of summer, typically defined as August or September. The job cuts themselves will create one-time costs of $500 million to $1 billion, Cisco said.
Cisco is in the midst of a 120-day review of its entire product portfolio to look for cost savings and businesses it doesn’t belong in, such as the Flip video camera unit that was recently shut down. The company said it is now clearly focused on routing, switching and services; collaboration; data center virtualization and cloud; video; and business process architectures.
“No excuses: We must act quickly, we are, and we will,” Chambers said.
In addition to public-sector sales, the company’s biggest pain points include its consumer business, which is already being reorganized, and enterprise switching. In particular, the introduction of the Nexus 7000 line of switches has cut into Cisco’s profit margins, Chambers said. He disclosed that the gross margin on one of these switches is 18 percentage points less than for the earlier Catalyst 6000 line, which was the mainstay of the company’s enterprise Ethernet business for many years. In addition, buyers typically need fewer of the new switches because they can accommodate more ports, he said.
However, Cisco intends to maintain its market-share leadership in switching, Chambers said.
“We do not underestimate the transition in front of us,” Chambers said.
Cisco’s profit for the quarter fell to US$0.33 per share from US$0.37 per share a year earlier. Its revenue rose just 4.8 percent, from US$10.4 billion to US$10.9 billion.
Though its results excluding one-time items matched or beat analysts’ forecasts, the company’s stock was hit by the report. In after-hours trading late Wednesday, Cisco shares were down US$0.57 at US$17.21.