Cisco to Ax Up to 6,000 Jobs, But It's Excited About SDN

Mitch Wagner
News Analysis
Mitch Wagner, Executive Editor, Light Reading
8/13/2014



SDN cast a glimmer of good news on a financial quarter in which Cisco continued to struggle, announcing plans for up to 6,000 layoffs amid steeply declining carrier demand.

Cisco halted three quarters of revenue decline, but barely, the company said in its fiscal fourth-quarter financial results announced Wednesday. Cisco delivered $12.4 billion revenue, same as the year-ago quarter. Revenue for 2014 was $47.1 billion, down 3%. (See Cisco Halts Revenue Decline – Barely.)

Net GAAP income for the fourth quarter was $2.2 billion, or $0.43 per share, compared with $2.3 billion or $0.42 per share in the year-ago quarter (in other words, overall income was down but earnings per share were up).

Revenue will be flat to up 1% in the first quarter of 2015, said John Chambers, Cisco chairman and CEO, on Wednesday's earnings call.

But, Chambers was much more optimistic about what he views as Cisco's bright prospects in the SDN era.

"For those of you out there that think SDN is going to drive down our gross margins, in my opinion, you're just wrong," Chambers said. SDN will increase gross margins for switching and architecture.

Cisco's Nexus 9000 and Application Centric Infrastructure (ACI) momentum is "on fire," Chambers said. Cisco tripled the number of customers, to over 580, since the end of last quarter. Cisco's Application Policy Infrastructure Controller has over 60 paying customers in less than a month of availability. Demand is strong among Cisco's cloud, hosting, financial services and technology provider customers. (See Cisco Ships Its SDN Architecture -- Almost.)

"We're clearly the only company out there talking about connecting applications to the infrastructure," said Rob Lloyd, Cisco president, development and sales. "And we're the only company talking about the applications not only in the context of the data center network but the entire network, including the wide area and the access layer."

He added, "When we talk about one of our competitors being a great underlay to another company's overlay, it kind of feels like being a foam pad between the hardwood floors and the carpet." That's an apparent reference to an alliance announced last week between Arista Networks Inc. , which describes its technology as an "underlay," and VMware Inc. (NYSE: VMW). (See VMware, Cisco Build Rival Data Center Teams.)

Cisco's gung ho attitude toward SDN will no doubt be good news for major customers including Goldman Sachs, which recently demanded Cisco embrace software networking. Verizon and Coca-Cola Enterprises previously made similar demands.

Cisco's service provider business declined 11% percent, with the biggest drop in video, where orders declined 13%. Service providers are dealing with business transitions and aggressively consolidating, Chambers said.

Cisco has been changing its techniques for selling to carriers, Chambers said. Cisco is focused on becoming solutions and outcomes-based, rather than just trying to sell routers and switches. But the transformation will take time to get results, he said.

Mergers and acquisitions such as Comcast Corp. (Nasdaq: CMCSA, CMCSK) and Time Warner Cable Inc. (NYSE: TWC) slow spending in the short term, as the companies assess how they will invest in the network. But in the long term, consolidation can increase opportunities for Cisco.

Carriers are struggling with their business models, having difficulty making money, which puts the squeeze on vendors, Chambers said.

"It's probably going to be tough for a little while," he said.

The company restructuring will affect up to 6,000 employees, or about 8% of Cisco's rolls, and will start in the current quarter. The restructuring will result in pretax charges of up to $700 million, about $250-$350 million of which will be recognized in the first quarter of 2015, and the remainder throughout the year, said Frank Calderoni, Cisco executive VP and CFO.


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Cisco's overall headcount has decreased by 1,000 from a year ago.

Cisco will work to make the reorganization a reallocation of resources, not a net reduction, and will reinvest resources in growth markets such as data center, software, security and cloud, Chambers said.

It's Cisco's fourth summer layoff in as many years. The company laid off 4,000 people a year ago, 1,300 in 2012, and 6,500 in 2011.

In other results of note:

  • Overall switching revenue was down 4% year-over year.

  • Cisco's data center business grew 30% year-over-year, gaining market share for the 18th consecutive quarter, with 41% market share for US blade servers, and a $3 billion run rate.

  • The wireless segment grew 1%. Service provider business was soft, but carriers are adopting Cisco's 802.11ac products. Cisco's Meraki cloud networking business, acquired in 2012, grew 116% year-on-year. (See Cisco Shells Out $1.2B for Meraki.)

— Mitch Wagner, Circle me on Google+ Follow me on TwitterVisit my LinkedIn profileFollow me on Facebook, West Coast Bureau Chief, Light Reading. Got a tip about SDN or NFV? Send it to [email protected]

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