Tech

Shira Ovide is a Bloomberg Gadfly columnist covering technology. She previously was a reporter for the Wall Street Journal.

Uh oh.

That was stock investors' (and likely employees') understandable reaction to a report that Cisco is planning to slash as many as 14,000 jobs, or up to 20 percent of its workforce. When an old-guard tech company grappling with scary industry changes starts to hack headcount, it's usually a sign that business is going down the tubes fast. Cisco's stock price fell as much as 2.5 percent in Wednesday trading ahead of the company's release of its fiscal fourth-quarter financial results after the U.S. market close. 

(In its earnings release, Cisco announced that it planned to cut 5,500 jobs, or 7 percent of its workforce.)

Let's inject a note of calm into the anxiety: Cisco has been better than most of the other 1990s-era tech empires about making sure its business and its headcount stay aligned. And Cisco is smart to rework its workforce while the company is still relatively healthy. 

Cisco's Slow Fade
Revenue growth is just starting to turn negative for Cisco
Source: Bloomberg

Cisco's $49 billion in revenue in its last full fiscal year was 14 percent higher than the amount four years earlier. The number of full-time employees over that period, about 72,000, didn't budge.

Compare that with Oracle, another company whose technology underpins some of the world's biggest companies. Oracle's headcount reached 136,000 in the 12 months ended May 31, 18 percent higher than four years earlier as the database giant expanded through acquisitions into more areas of technology. Oracle's sales, however, were flat during the same four-year stretch. Employee counts at Microsoft and Intel have also outpaced revenue gains. 

Keeping Pace
Cisco's headcount has barely budged from four years ago even as sales have increased. At other old-guard tech companies, headcount and revenue changes have been out of whack.
Source: Bloomberg

If Cisco determines it has to cut even more jobs, it will be a sign the company's confidence is waning. Cisco sells high-end equipment plus specialized software that funnels internet traffic around the world. Selling essential equipment at a big markup is an amazing business model. Until it isn't anymore. 

Some of the world's biggest buyers of technology equipment, such as Google, Goldman Sachs and Facebook, are backing new technologies that sidestep Cisco's. As an alternative to traditional data-center equipment like Cisco's, factories in Taiwan are selling no-name, low-cost hardware that customers can buy and power with whatever software they wish. More businesses are opting to outsource their technology to providers like Amazon, which will leave a smaller pool of buyers for Cisco's networking gear. 

None of these slow-moving technology changes will crush Cisco all at once, but the trends are not in the company's favor. Cisco's management knows this. Investors know this. Cisco's customers and competitors know this. Cisco's business and its P&L will probably not look the same in 10 years, although that doesn't make the company a doomed dinosaur, just one that needs to evolve. It is doing exactly that by pushing into newer technology areas, including pure software, and -- yes -- cutting expenses to keep pace with slowing revenue. 

The same tech transformation and slow-to-negative sales growth is bedeviling Microsoft, Intel, Oracle, IBM and many other giants. There's no easy solution for any of them. Look at what happened to the company former known as Hewlett-Packard, which has had mass layoff after mass layoff as its revenue shrinks. Cisco's sales have held up better, for now. That's why it's smart to cut headcount now, before the wound gets too deep and Cisco really feels the pain from industry changes. Intel took exactly the same route this spring when it said it would cut 11 percent of its workforce, again while times were still relatively good for the chip maker. 

Cisco Slice
Job cuts are an annual event at the world's largest networking-equipment maker with the latest round set to be the largest since at least 2009
Source: Bloomberg, CRN

Too much is shifting in the world's technology plumbing to ever return to Cisco's go-go days when it was the world's biggest company by stock market value. But the company has proved to be more adept than nearly of all its peers at keeping its head above the big scary waves, and making sure its employee count does, too. 

--with assistance from Tim Culpan

This column does not necessarily reflect the opinion of Bloomberg LP and its owners.

(Adds new third paragraph with Cisco's announcement of job cuts.)

To contact the author of this story:
Shira Ovide in New York at sovide@bloomberg.net

To contact the editor responsible for this story:
Daniel Niemi at dniemi1@bloomberg.net