Cisco Cuts Workforce by 7% to Speed Transition to Software

Cisco Systems Inc., the biggest maker of equipment that runs the internet, plans to cut about 7% of its workforce, trying to recast itself as a provider of software-based systems and services.

The company will eliminate 5,500 positions from its workforce of more than 73,700, Cisco (IW500/21) said Wednesday in a statement. Savings from the job reductions will be invested in newer businesses that Cisco expects to fuel sales growth, such as cloud computing and connected devices. The company said it will take charges totaling about $700 million associated with the restructuring.

“We need to make some pretty immediate shifts in our portfolio,” Cisco Chief Executive Officer Chuck Robbins said in an interview. “We have rapidly shifting customer expectations. The winners in the future will be the ones that understand those dynamics.”

Robbins, who took over in July 2015, has been working to rekindle growth by shifting Cisco toward software-based networking, security and management products, which customers increasingly prefer because they’re less expensive and more versatile. Cutting Cisco’s workforce may give Robbins the resources to speed the company’s transition, potentially helping it take advantage of stronger demand in markets such as security, which grew 16% in the fourth quarter, and collaboration, where sales rose 6%.

Seeking Growth Potential

“We are looking at the areas where we believe growth will come faster,” Robbins said on a conference call. “It’s not that we’re ignoring one in favor of another, we just want to make sure our investments are commensurate with the growth opportunity.”

Shares of the company declined about 1% in extended trading following the announcement. Earlier they had fallen 1.3% to $30.72, leaving them up 13% this year.

“Cisco is plodding along,” said David Heger, an analyst at Edward Jones & Co. “They’re not overall declining. That’s a signal that they’re managing the transition fairly well.”

Underlining Cisco’s struggles to revitalize growth, the company Wednesday reported fourth-quarter sales that declined 2% from a year earlier in a “challenging macro environment.”

Emerging Markets Slow

Orders in emerging markets and to service providers slowed, hurting router revenue, Robbins said on the call. In times of economic uncertainty, companies try to extend the life of existing equipment, he said. While there was “pause” in ordering in the U.K. as companies tried to calculate the impact on their business of the country’s decision to leave the European Union, that hasn’t translated into a broader weakening of demand in Europe, Robbins said.

Sales in Cisco’s biggest business unit, switching, increased 2% to $3.8 billion while routing, the second-largest revenue source, fell 6% to $1.9 billion. The company’s Europe, Middle East and Africa sales region suffered a 3% decline in product orders in the fourth quarter.

The headcount reduction was much less than some analysts had speculated and in line with a more typical annual cut of 5%, Simon Leopold, an analyst at Raymond James, said in a note. Any more and investors would have been concerned that Cisco was signaling “a more challenging sales environment that we had expected.”

The company last announced a large round of firings in August 2014, when it eliminated 6,000 positions. Cisco’s workforce is down from the 75,000 it employed in 2013.

By Ian King