Cisco Will Cut 6,500 Workers, Record $1.3 Billion in Costs
Cisco Systems Inc. (CSCO), the largest networking-equipment maker, plans to eliminate about 6,500 jobs, or 9 percent of its full-time workforce, to help trim $1 billion in annual costs and step up profit growth.
The cuts include 2,100 employees who took a voluntary early-retirement program, Cisco said today in a statement. As part of the move, the company expects to record pretax restructuring expenses of $1.3 billion. About $750 million will come in the fiscal fourth quarter and the remainder will be booked in fiscal 2012. Cisco also said it will sell a manufacturing plant in Mexico, transferring 5,000 workers.
Cisco Chief Executive Officer John Chambers has been eliminating jobs and abandoning less-profitable businesses amid slowing sales gains. The company has lost market share in its main switching and routing units to Juniper Networks Inc. and Hewlett-Packard Co. (HPQ), and its forays into consumer products, such as the Flip video camera, faltered.
“Cisco recognizes that it’s in an increased competitive environment and it needs to lower its costs,” said Alkesh Shah, an analyst at Evercore Partners in New York. “These actions are taking them to a lower-cost model.” Shah rates the stock an “overweight” with a price target of $24.
Cisco slipped 16 cents to $15.44 at 4 p.m. New York time on the Nasdaq Stock Market. The shares have declined 24 percent this year.
Cisco, based in San Jose, California, said it will sell the television set-top box plant in Juarez, Mexico, to Foxconn Technology Group. Cisco acquired the site when it took over Scientific-Atlanta Inc. in 2006. No job losses are expected from the sale, Cisco said.
The job cuts will come from across the company and aren’t concentrated in a single unit, said Karen Tillman, a company spokeswoman, in an interview. She declined to provide a geographic breakdown of the reduction. The company said affected workers in the U.S., Canada and other countries it didn’t name will be notified the first week of August. Other workers may be notified later.
Chambers is exiting some of the dozens of new businesses Cisco entered in the past decade as he aims to shore up the switching and router businesses that made up more than half of the company’s revenue last year.
Cisco’s share of worldwide switching revenue dropped 5.8 percentage points to 68.5 percent in the first quarter of 2011 from a year earlier, according to a May report from Dell’Oro Group, a Redwood City, California-based researcher. Hewlett- Packard gained switching share in that period. In global router sales, Cisco lost 6.4 percentage points to 54.2 percent of the market, while Juniper gained, Dell’Oro said.
Fired workers will receive six months of severance pay and four months of job search assistance, Tillman said.
Today’s cuts are in addition to the 550 employees the company fired when it closed its Flip video-camera unit in May as part of a reorganization of the consumer business. Two people familiar with the company’s plans said last week that Cisco was planning to shed as many as 10,000 workers.
The company also intends to ramp up demand with an updated version of its flagship Catalyst 6500 switch, announced last week at the Cisco Live conference in Las Vegas. The new switches are designed to be faster and more secure, and accommodate as many as 10,000 mobile devices from a single machine.
Cisco’s revenue is projected to rise 7 percent this year to $43 billion, less than the 11 percent growth posted in 2010, according to the average estimate of analysts in a Bloomberg survey. Analysts have an average target price of $20.48 for the stock, Bloomberg data show.
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