Cisco Systems may cut as many as 5,000 jobs in August, the latest significant move as the networking giant looks to reorganize its business and improve its bottom line, according to market research firm Gleacher & Co.
In a research note July 11, Gleacher analyst Brian Marshall said the job cuts could rival the 8,000 layoffs that Cisco (Nasdaq: CSCO) initiated in 2001, soon after the Internet market crash. In this case, the 5,000 job cuts to the company’s 73,000-strong workforce would be painful but necessary, Marshall said, saving Cisco about $1 billion annually.
They also would mark only one of several steps the analyst said Cisco has to make to ease Wall Street concerns.
“While this is a difficult decision to make, in our view, it is required in order to maintain the -competitiveness’ of [Cisco] going forward,” Marshall wrote in his research note.
His message comes after Cisco, which has been hampered by several quarters of disappointing financial numbers, looks for ways to improve the company’s operations. The company restructured its consumer business in April, including shuttering its profitable Flip personal video camera business. In May, Cisco streamlined its management, sales and services units, a move to help it more easily focus on five IT areas-routing and switching, collaboration, data center virtualization and cloud, video, and what officials are calling architectures for business transformation. Cisco also reduced the number of management councils from nine to three.
A week later, during a conference call to announce quarterly financial earnings, Chairman and CEO John Chambers warned of layoffs as the company looked to cut $1 billion in operating expenses this year. Days after Chambers’ talk, analysts were predicting significant cuts of 4,000 or more.
Marshall’s research note also was released as Cisco Live, the company’s major customer and partner event, gets under way in Las Vegas. The Gleacher analyst said he expects “significant news flow this week,” adding that he is focusing on Chambers’ keynote July 12 and other keynotes July 12 and 13.
Along with the job cuts and restructuring that already were announced, Marshall pointed to several other steps the vendor needs to make, including formally lowering its long-term financial targets. Chambers had been saying over the past couple of years that he was targeting annual revenue growth for Cisco at 12 to 17 percent. During his conference call in May, Chambers said that goal was “off the table.” Marshall said the company would do well to offer a more modest goal of 10 percent or so, noting that Cisco has seen annual revenue growth of 11 percent over the past five years.
He suggested that formal lowering of the financial goals could come at Cisco’s annual analyst conference in September.
Despite Cisco’s recent disappointing financial numbers, the vendor has some significant factors working in its favor, according to Marshall. The company has a strong valuation, and it still holds about 70 percent of the core routing and switching market, a maturing sector that doesn’t offer Cisco much room for growth. However, some other business areas that Cisco is looking to grow-from video communications to data center infrastructure-represent strong growth areas.
He also noted Cisco’s Vblock data-center-in-a-box offering, which includes not only Cisco’s infrastructure products, but also EMC’s storage and security technologies and VMware’s vSphere virtualization management and services offerings. Marshall called it Cisco’s “ace in the hole,” adding that it seems to be gaining traction in the market.
“Although early in its lifecycle (e.g., Vblocks started shipping at the start of 2010), the ramp has been impressive thus far with partner management (e.g., EMC) recently commenting that Vblock has a $1.0+ billion pipeline with over 120 partners,” Marshall wrote.
However, there are ongoing concerns, he said. Marshall said that Cisco is seeing increasing competition in its core routing and switching business, not only from large competitors such as Hewlett-Packard, but also from the likes of Juniper Networks, Riverbed Technology, Brocade and Force Five, a scenario that he described as “chimpanzees … attacking the gorilla.”
“Due to their smaller status, innovative culture and ability to remain nimble in changing times, these competitors have started to chip away at CSCO’s dominance,” he wrote.
For example, between 2008 and 2010, Cisco grew its total revenue base by 7 percent, or $2.8 billion. However, the group of smaller competitors, while only having a collective total revenue base of $9.7 billion in 2010, added $2.2 billion during the same two years, almost as much as Cisco.
“Based on this analysis, it is clear that innovative companies can still have an impact in the technology industry even when competing against an 800 pound gorilla,” he wrote. “Many expect this trend to continue for the foreseeable future.”
Analysts have argued that Cisco has seen increasing pressure on its switching and routing business because of increasing competition among vendors looking to become a lower-cost alternative. They also have said that Cisco’s focus on expanding into more than two dozen adjacent markets over the past couple of years has enabled rivals to attack Cisco’s core business.