Cisco Systems, the largest maker of networking equipment, plans to cut thousands of jobs after sales growth evaporated as corporate spending on technology slowed.
The company announced Wednesday that the restructuring plan will affect about 5% of Cisco's workforce. As of last year, the company had about 85,000 employees, and the move will include about 4,000 jobs. Cisco said the restructuring would cost about $500 million.
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The announcement came with an outlook that was well below Wall Street's expectations, sending Cisco shares plummeting in late trading. Chief Executive Officer Chuck Robbins told analysts on a conference call that customers are concerned about the economic situation, prompting them to delay orders and reconsider the amount of equipment they need.
“Customers are pushing things out and scrutinizing things a little bit more,” he said.
Cisco joins many large technology companies in downsizing. Nearly 35,000 layoffs have been announced for 2024, according to Layoffs.fyi, which has been tracking technology layoffs since the pandemic.
Cisco shares fell as much as 6.7% in late trading on the weak outlook. The stock price remained largely unchanged in 2024, closing at $50.28 in New York.
Sales for the fiscal third quarter ending in April are expected to be between $12.1 billion and $12.3 billion. This compares to the average analyst estimate of $13.1 billion. Excluding certain items, earnings are expected to be 84 cents to 86 cents a share, compared with the forecast of 92 cents.
For fiscal year 2024, the company currently forecasts a range of $51.5 billion to $52.5 billion. Earnings, excluding certain items, are expected to be between $3.68 and $3.74 per share. Both of these targets are below what Wall Street expects.
Cisco's adjusted gross margin (the percentage of sales remaining after production costs) is expected to be 66% to 67% for the quarter.
Revenue for Cisco's fiscal second quarter, which ended Jan. 27, fell 6% to $12.8 billion. This is the first contraction in three years for the company. Earnings, excluding certain items, were 87 cents per share. Analysts had expected sales of $12.7 billion and earnings of 92 cents a share.
Orders fell 12% in the second quarter. And the recovery will not be as rapid in the second half of the year as the company previously expected, Robbins said.
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The company said it was experiencing a temporary “stoppage” in orders from customers who were busy installing equipment they had already purchased. The supply backlog should clear in the second half of this year, but the weak spending by carriers is likely to last longer than previously predicted, Cisco said.
Robbins is trying to reduce the volatility in Cisco's revenue by offering more networking services, especially analytics and security features delivered over the Internet. The idea is to focus on subscription revenue rather than his one-off sales of large-scale network equipment. In addition to this effort, Cisco is acquiring data processing software maker Splunk for his $28 billion, a deal he announced in September.
Robbins said the deal is expected to close as early as this quarter. This means that Cisco is making headcount cuts just as it prepares to absorb the company, which had 8,000 employees as of January last year. But Splunk does its own reductions. The company announced plans in November to cut its workforce by about 7%.
Investors are watching to see how much Cisco benefits from a surge in spending on artificially intelligent computer systems. Earlier this month, the company announced it would work with chipmaker Nvidia Corp. to make it easier for enterprise customers to adopt AI.
Nvidia is the biggest beneficiary of the AI spending boom, but its customers are typically large data center owners like Microsoft Corp. and Alphabet's Google. By joining forces, the two companies hope to expand the use of their technology. Cisco previously said it had about $1 billion in AI-related orders.
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