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Cisco Systems officials are warning of job cuts and more reorganization inside the company as the networking giant looks to regain its footing after several difficult financial quarters.
During a conference call May 11 to announce fiscal year 2011 third-quarter earnings, Cisco Chairman and CEO John Chambers said that while he is confident that the company will bounce back, the next few months will continue to be rough ones.
Chambers warned that the company may miss analysts’ forecasts in profits and revenues in the current quarter, and said that expected cuts of $1 billion in operating revenue over the next couple of quarters will include reducing Cisco’s 73,400-person workforce. Neither Chambers nor Gary Moore, Cisco’s recently appointed COO, said how many jobs will be lost, though they did say the company has instituted a voluntary retirement plan.
He also said that Cisco’s goal of 12 to 17 percent growth every year was “off the table.”
“We know what we have to do,” Chambers said. “We have a clear game plan.”
For the quarter, sales grew 4.8 percent over the same period last year, to $10.9 billion. However, net income came in at $1.8 billion, a drop of 17.6 percent. For the fourth quarter, Cisco executives said sales will come in between $10.8 billion and $11.1 billion, lower than the $11.6 billion analysts were predicting.
Chambers said there were some business units that continued to thrive, including the company’s data center business, which includes its UCS (Unified Computing System) converged infrastructure offering. Cisco picked up 1,570 new UCS customers during the quarter, bringing the total to more than 5,400, he said. The business is showing an annual run rate of about $900 million. Overall, Cisco’s unit that oversees data center products, virtualization and cloud computing saw revenues grow 31 percent.
Emerging markets also are doing well for Cisco, he said.
However, some business units-in particular, the core switching business and government unit-are struggling. Revenues in the switching business were down 9 percent over the third quarter last year, while the public sector business-with both federal and state governments struggling to deal with budget shortfalls-dropped 8 percent.
Cisco’s switching business has been hit hard by competition from the likes of Hewlett-Packard, Juniper Networks and Avaya. Analysts have argued that Cisco’s efforts to rapidly expand into more than “adjacencies”-or side businesses-gave rivals the opportunity to take market share from Cisco, which saw its share drop to about 67 percent last year.
Officials with both HP and Juniper have been particularly vocal in their intentions to take on Cisco with high-performing but lower-cost products. In a keynote address at Interop 2011 May 10, Dave Donatelli, HP’s executive vice president and general manager of enterprise servers, storage and networking, called out Cisco, saying HP’s networking products are better than its rival’s.
Chambers Welcomes Competition
Chambers said he welcomes competition-it being a sign that Cisco is in the right markets-and said that changes made in how the engineers work will make it easier for Cisco to more quickly get products into the market. For example, where once it might take five years to get a product from inception to launch, it now will take three, he said.
After several disappointing quarters, Chambers in early April sent out a lengthy memo to employees noting that Cisco had lost its way and that changes were afoot designed to correct problems. Soon after, Chambers essentially gutted the company’s underperforming consumer business, including shuttering its popular Flip video camera line.
Cisco earlier this month reorganized its sales, services and management groups to increase accountability and streamline decision-making. That included whittling down the number of management councils from nine to three.
Both Chambers and Moore said during the conference call that changes are not over and that Cisco will continue to realign its business units and organization, including dumping underperforming businesses and cutting jobs.
“You’ll see us make more changes and tradeoffs in the months ahead,” Moore said.
There were victories in the quarter, Chambers said. The company’s new CRS-3 router was being adopted at a faster rate than the original CRS-1, and sales of the switches for small and midsize companies-such as the Nexus 5000-were good. He admitted, though, that business at the high end, with the Nexus 7000, was sluggish.
Chambers said he is confident that despite the issues of the past few quarters, Cisco is headed in the right direction, and that the steps the company is taking will eventually make it stronger. He also told analysts that the expected changes aren’t going to be a long, drawn-out affair.
“Every time we’ve done it in the past, we’ve done it crisply, and then we came out of it,” he said.