Shares in Cisco Systems Inc. took a hit following news that the company will cut 14,000 jobs around the world, representing 20% of its total workforce.
The world’s largest maker of networking equipment will announce the job cuts in the coming weeks, according to a report from technology website CRN which cites unnamed sources. Cisco spokeswoman Andrea Duffy did not comment on the report, according to Bloomberg.
Cisco transitioning from hardware to software
Since taking up the position in July 2015, Cisco CEO Chuck Robbins has been trying to increase growth by moving towards software-based networking, security and management products. Customers are increasingly looking for solutions in this mold due to lower costs and better versatility. The job cuts are a product of this move from hardware to software, according to CRN.
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JPMorgan Chase & Co. analyst Rod Hall says that Cisco has been preparing for tough times for a while as commoditization of its switches business sees lower profits over time. Shares in the company were down 1.8% at 9:56 am New York time, but were up 15% on the year at end of business on Tuesday.
Hall believes that the job cuts may have a “large potential positive impact” on results in the near term, increasing earnings for 2017 by 9-13% per share. Analysts are predicting a decline in sales of 2% to $12.6 billion when Cisco reports Q4 earnings on Wednesday.
Job cuts as part of wider strategy
If this is true “we would see it as a sign that Cisco is finally beginning to behave like a company facing technological disruption,” Hall said. The move suggests “that the new management team is willing to make the tough decisions necessary to navigate what we believe are going to be very choppy waters in the next 3-5 years.”
In April the company employed approximately 73,100 people, according to Bloomberg. The last major round of job cuts came in August 2014, when 6,000 people were laid off.
The CRN report claims that the move to software calls for employees with different skill sets. Many employees have reportedly been offered early retirement plans.
Cisco recently acquired Jasper Technologies, which makes software that connects multiple kinds of electronic devices. This is seen as a sign of Cisco’s move towards software.
Robbins has had some success in changing Cisco’s focus, and the company projected sales growth of around 3% for the fiscal fourth quarter. However he admits that earnings are way off target.
The switching decision saw sales decline 3% year on year, while routing fell 5% over the same period. Newer sectors such as security, collaboration and service-provider video saw sales increase by over 10%.