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Did Cisco Cut Deep Enough?

With Cisco's layoffs prepped and loaded, there is still some debate about how deep the cuts should run

Craig Matsumoto

July 19, 2011

3 Min Read
Did Cisco Cut Deep Enough?

Cisco Systems Inc. (Nasdaq: CSCO) made its layoff announcement Monday, but is it really cutting expenses fast enough to get back on track?

Cisco's goal to cut $1 billion in annual expenses still implies that its fourth-quarter expenses would be about $4.2 billion. That's actually up from the third quarter by about $200 million, and it's even higher than the fourth quarter of 2010, by more than $350 million, writes analyst George Notter of Jefferies & Company Inc. , in a note issued Tuesday morning.

Cisco's problem all along was that it chased growth, Notter writes. That became a problem as the company, well, grew. It's harder to make a bigger company grow by 12 to 17 percent per year, as Chambers kept forecasting -- especially when that company has nearly saturated its maturing franchise businesses.

"Had management acknowledged that the business was mature, cut growth expectations, and instituted a more significant dividend policy, some of their current issues may have been avoidable," Notter writes.

Notter notes that Cisco can still get worse. He does think the business can improve, but he says any such change would take a long time; it's the usual metaphor of trying to turn a very large ship.

Cisco's cuts of 6,500, plus another 5,000 tied to the sale of its set-top manufacturing facility, were about what analysts were expecting. Most didn't buy into the worst-case scenarios with layoffs numbering 10,000 or more. (See Cisco Simplifies; Cuts 6,500 Jobs and Foxconn Buys Cisco's Set-Top Factory .)

"They're a pretty heavy organization as far as staffing goes, and Chambers made it very clear they need to cut expenses," says Zeus Kerravala, an analyst with Yankee Group Research Inc.

Cisco got 2,100 employees to take the early retirement package -- a figure that's probably stunted due to the economy. "People who could retire before can't now," Kerravala says.

No product areas got mentioned in Cisco's layoff announcement. That might be a reflection of the fact that, after divesting the Flip camera line, Cisco doesn't have many more obvious pieces to cut. (See Cisco Flips on Consumer Business.)

Some are outside Cisco's core business but are profitable (like WebEx Communications ). Others are facing stiff competition but aren't big enough to be considered damaging (WAN acceleration, where Cisco is battling Riverbed Technology Inc. (Nasdaq: RVBD)).

And the most popular targets are too closely tied to Cisco's core businesses.

"Everybody looks at set-top boxes and says Cisco should cut the set-top box. But that's often part of a bigger sale to a cable company, with switches and routers," Kerravala says. "It would be detrimental to their relationships." Likewise, he thinks Cisco's customers would prefer that the company hang on to the Linksys product family.

Notter disagrees. He sees lots of Flips in Cisco's portfolio.

"We'd argue that M&A deals and new product initiatives like umi, Webex, the Cius tablet, Andiamo/MDS 9000 and UCS [Unified Computing System for data centers] are similarly misguided," Notter writes. "We would be surprised if Cisco -- over the long term -- can make these businesses generate interesting returns for shareholders."

Kerravala does expect Cisco to trim its 30 market adjacencies, something he'd noted to Light Reading last week. (See Chambers Promises a Simpler Cisco.)

— Craig Matsumoto, West Coast Editor, Light Reading

About the Author(s)

Craig Matsumoto

Editor-in-Chief, Light Reading

Yes, THAT Craig Matsumoto – who used to be at Light Reading from 2002 until 2013 and then went away and did other stuff and now HE'S BACK! As Editor-in-Chief. Go Craig!!

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