Cisco Systems Inc. (CSCO) Chief Executive Officer John Chambers is struggling to revamp the world’s largest networking-equipment maker, eliminating 6,000 jobs in a new round of cuts and forecasting little to no sales growth.
Including the latest firings, representing about 8 percent of Cisco’s workforce of 74,000, the company has gotten rid of 25,850 positions since February 2009, according to data compiled by Bloomberg. Revenue fell 3 percent to $47.1 billion in the fiscal year that ended July 26, the first decline in five years.
The results underscore the difficulties facing Chambers as he seeks to remake Cisco and leave it in the hands of a successor. With the CEO nearing retirement after almost two decades, customers are telling Chambers that they won’t keep paying for expensive hardware that shuttles data and Internet traffic, when software can squeeze out more performance and make the machines more versatile. While Cisco has introduced software-driven products, that hasn’t yet boosted revenue.
“Even if the transition to a more software-oriented business model is successful, revenues are going to come under pressure,” said Brian Marshall, an analyst at International Strategy & Investment Group LLC. “Unfortunately, headcount reductions are going to be a thing of the future.”
Sales in the quarter that ends in October will be $12.1 billion to $12.2 billion, based on the company’s forecast for revenue to be unchanged or rise 1 percent. Analysts were projecting, on average, sales of $12.1 billion, according to data compiled by Bloomberg
Cisco fell 2.6 percent to $24.54 at the close in New York. Shares of the San Jose, California-based company are up 9.4 percent this year, compared with a gain of 5.8 percent in the Standard & Poor’s 500 Index.
While Cisco has eliminated jobs as it seeks to reinvent itself, it has hired more, with headcount climbing by 8,000 employees since 2009, when its workforce was about 66,000.
Cisco has been buying software companies and working on new software-based businesses for the past three years, with some success. Chambers also said that orders for its software-defined networking switch tripled from the previous quarter, and that 60 companies were already paying for its SDN software, which has been on sale for only two weeks.
“That’s pretty phenomenal,” Marshall said.
Sales in emerging markets won’t recover for several more quarters, Chambers said on a conference call yesterday.
“They’re making good progress, but this emerging market weakness is going to make things hard for Cisco for the next few quarters,” said Alex Henderson, an analyst at Needham & Co., who has a hold rating on Cisco’s stock.
Revenue in the period that ended July 26 was $12.4 billion, the company said in a statement yesterday, topping analysts’ estimate for $12.2 billion. Profit, excluding some items, was 55 cents a share, versus a prediction for 53 cents. Cisco said it will take a pretax charge of as much as $700 million related to the job cuts.
Cisco’s orders in the U.S. rose 5 percent, while those in Asia fell 7 percent. Net income in the fourth quarter fell to $2.25 billion, or 43 cents a share, from $2.27 billion, or 42 cents, a year earlier.
Cisco faces a challenging shift as customers move from buying hundreds or thousands of proprietary machines with gross margins of 60 percent or more to software-defined networks that can run more efficiently on cheaper gear. The trend has been embraced by companies including Google Inc. and Facebook Inc.
“Software is a fairly large business for us, and we’re going to be investing in it even more heavily.” Cisco Chief Financial Officer Frank Calderoni said in an interview. “We’re not talking about software replacing our hardware, but being additive to our hardware.”
The company has come under increased pressure from rivals including Huawei Technologies Co. and Arista Networks Inc. (ANET) in its main businesses, while newer competitors such as Palo Alto Networks Inc. (PANW) and FireEye Inc. take share in growing markets such as computer and network security.
Cisco has exited consumer businesses, cut staff and restructured its management. Companies such as Goldman Sachs Group Inc., Verizon Communications Inc. and Coca-Cola Enterprises Inc. are telling Cisco that they won’t keep paying for expensive equipment, when software can squeeze out more performance and make the machines more versatile.
“What we spent on your gear last year is not what we’re going to spend on your gear this year, unless you do something really different,” Martin Chavez, chief information officer at Goldman Sachs, recalled telling Chambers earlier this year.
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