Business

Cisco may slash 10,000 workers

Posted July 12, 2011 7:30 a.m. EDT
Updated July 12, 2011 6:51 p.m. EDT

— Significant layoffs reportedly will be striking soon at Cisco (Nasdaq: CSCO), and that likely means bad news for Research Triangle Park.

Cisco employs about 4,000 people at its multi-building campus in RTP – the largest collection of corporate workers outside the firm's Silicon Valley headquarters.

On Monday, Bloomberg quoted two people familiar with the largest networking-equipment company's plans who said the Cisco might cut as many as 10,000 jobs, or about 14 percent of its workforce.

Cisco officials only said Tuesday that any official announcement about numbers and locations is a month away. Most analysts believe the company will cut at least 5,000 jobs.

Cisco's next quarterly earnings report is due Aug. 11.

Layoffs have been expected since May when Chairman and Chief Executive Officer John Chambers shut down a consumer video camera business unit and launched an early retirement program. The deadline to accept the early retirement program was July 8, according to the broadband news website Light Reading.

At that time, Chambers talked about a 6 percent reduction.

The cuts include as many as 7,000 jobs that would be eliminated by the end of August, said the sources, who asked not to be identified because the plans aren’t final. Cisco is also providing early-retirement packages to about 3,000 workers who accepted buyouts, the people said.

Chambers is slashing jobs and exiting less-profitable businesses as competitors such as Juniper Networks Inc. and Hewlett-Packard Co. take market share in Cisco’s main businesses with lower-priced, simpler products. Sales of Cisco’s switches and routers, which made up more than half of revenue last year, will continue to slip, said Brian Marshall, an analyst at Gleacher & Co.

Industry observers like Tony O'Driscoll, of Duke University's Fuqua School of Business, said Cisco expanded into broad markets too far from its core.

"This is probably a period of retrenchment and refocus," O'Driscoll said. "I see the infrastructure part of Cisco's business, which it looks like they're doubling down on as being a strong fundamental business."

He said he doesn't believe Cisco's pullback is the start of a trend among tech companies. In fact, he's bullish on the sector as a whole and said tech is as strong as it's been.

"To a certain extent, it's almost like air. You only notice it in its absence. It's so pervasive, we're almost unaware of it," he said.

‘Too many employees’

Eliminating jobs will help Cisco wring $1 billion in savings in fiscal 2012, the company said in May. Cisco expects costs of $500 million to $1.1 billion in the fiscal fourth quarter as a result of the voluntary early retirement program, it said in a quarterly filing.

“We will provide additional detail on the cost reductions, including layoffs, on our next earnings call,” Karen Tillman, a spokeswoman for San Jose, Calif.-based Cisco, said in reference to an earnings call scheduled for early August. She declined to discuss job-cut figures.

The voluntary retirement packages included one year’s pay and medical benefits, and were offered to about 5,800 employees, two people said.

“The revenue trajectory hasn’t been where it should be,” Marshall, who has a “neutral” rating on the stock with a target price of $17, said in an interview. “The company is not staffed on an appropriate level. They simply have too many employees.”

Analysts at Gleacher and Miller Tabak & Co. said Monday that the company would cut at least 5,000 jobs as part of a turnaround effort.

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.

Router losses

In global router sales, Cisco lost 6.4 percentage points to 54.2 percent of the market, while Juniper gained, Dell’Oro said.

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 stock target price of $20.62, Bloomberg data show.

Cisco said in May that it shuttered the Flip video-camera unit and cut 550 jobs. The company may eliminate more positions in the consumer-product unit, which makes Linksys home- networking equipment, Marshall said.

Some investors have said the company should exit consumer products entirely to focus on traditional enterprise offerings such as routers and switches. Cisco’s equipment is used by corporate networks and telephone and Internet service providers to direct Web traffic.

Trimming about 5,000 jobs would reduce operating expenses by about $1 billion annually and boost 2012 earnings by about 8 percent, Marshall said.

The company is also reorganizing management to streamline its business and focus on areas of growth, Cisco said in May. To speed decision making, the company organized field operations into three geographic regions and reformed a council-style management structure.

O'Driscoll sees the tech bellwether as a major player for years to come.

"We're going to be building 10 to 15 cities of over 1 million people in the next 20 years, and that's something Cisco does very well," he said.