In a sign of the times, networking equipment leader Cisco Systems, Inc. (NASDAQ:CSCO) has resorted to a cut in its workforce by almost 2 percent, which is approximately 1,300 jobs.
The result of slowing enterprise spending and the European sovereign debt crisis, the move shows how the company is fighting drooping sales and falling order quantities from the bigger corporates.
Though the company claimed that the cuts were a means to simplify the company, analysts view the action as simply not enough, and point to the need for growing gross margins and better growth in sales, as priorities to focus on operational efficiencies. It may be recalled that last year the company cut $1 billion in costs by reducing 6,500 jobs and closed its video camera unit. It also streamlined its management structure, and cut prices to become more competitive.
Its third quarter results, reported in May, were reasonably good, as revenues rose 6.6 percent from a year ago and earnings per share rose 14 percent from 42 cents to 48 cents, mostly in line and beating earnings by a whisker. But its forecast for the ensuing quarter was dim with revenue growth expected at only 2 to 5 percent i.e. within the band of $11.4 billion and $11.8 billion, while EPS was forecast at 44 to 46 cents a share, both below market expectations. Apparently, the global technology spending outlook was clouded, and economic weakness took their toll on the forecasts.
The fresh job cut, announced today, does not bode well for the fourth quarter results, which are scheduled to be reported August 15.
Over the past few years, Cisco Systems, Inc. (NASDAQ:CSCO) has transformed itself from a networking products company, to one that also offered storage and server services, becoming a data center infrastructure specialist, and directly competing for the cloud with HP, Dell, and IBM. These companies responded by entering Cisco’s bread-and-butter areas. In the net result, Cisco, the data center networking specialist made a splash in the server market; and server companies Hewlett-Packard Company (NYSE:HPQ), International Business Machines Corp. (NYSE:IBM) and Dell Inc. (NASDAQ:DELL) shot back by cozying up with Ciscos’s competitors in data center networking. The competitive environment for all these companies, including Cisco, has therefore shot up manyfold, and there could be difficult times ahead for all the parties involved. HP has already been identified as a short candidate by Jim Chanos, saying it is the ultimate value trap.
