Cisco CFO: More Cuts Needed

In a speech to investors in Tokyo early today, Larry Carter, CFO of Cisco Systems Inc. (Nasdaq: CSCO), cited the importance of reducing the company's operating expenses even more, though signs are good that the "recession may be coming to an end" in the U.S.

Early wire reports that inferred Carter meant layoffs were incorrect, say Cisco spokespeople back in San Jose. Indeed, during the conference Webcast, Carter made no reference to any plans to cut jobs further.

"There are no plans for additional layoffs at this time," says spokeswoman Terry Anderson. Cisco, which reported its earnings February 6, is looking at ongoing cuts in discretionary spending, such as travel costs and temporary workers, she says, and there's no news in that (see Cisco Beats Street; Growth is Flat). But she acknowledges that Cisco isn't immune to economic conditions.

Carter noted that Cisco's headcount has been reduced by roughly 6,275 since the second quarter of 2001. Today, the company has 36,786 workers. Carter says the company now has an annual revenue per employee of $518,000 but wants to see that figure climb to $700,000 per employee, close to where it was in the first quarter of 2001.

During the financial portion of his talk, Carter pointed to a "modest recovery and some progress in getting our growth back on track." A bit later he stated, "Our operating expenses need to get down further," but he didn't specify how this might be done. He said progress has been made in Cisco's restructuring plan, which included a worldwide workforce reduction, but there are ongoing efforts to reduce spending. Directly afterward, he said the company would like to see its ratio of operating expenses as a percentage of revenue move from the mid-30s to the 20 percent range.

Highlights from the rest of Carter's talk:

• Macroeconomy's a mixed bag. Carter acknowledged the ongoing challenges of the global economy, but he said Cisco sees signs of recovery in the U.S. enterprise market, though he thinks CEOs will remain conservative, waiting for their own profitability to return before ramping up their capex once again.
  
  The carrier market, he noted, is still in recession, and he cited analyst forecasts that spending in that sector will dip 20 to 25 percent more this year. He also acknowledged the carrier portion of Cisco's sales is considerably lower than last year, when service providers accounted for about one-third of the company's revenue. This seems to be in keeping with analyst claims that Cisco's making inroads again in the enterprise market, upping its share figures a bit (see Cisco's See-Saw Day, Report: Core Router Market Falls 22%, and Juniper Sinks in Market-Share Scare).
  
  
• IP, optical networking are key. Carter named Core IP routing and Layer 3 switching, optical networking, content delivery, voice over IP, wireless LAN, and storage -- in that order -- as strategic areas for Cisco this coming year. Regarding optical networking, he was explicit about the company's focus on metropolitan area networking, versus long haul, where he says there's little opportunity for Cisco right now. And as for storage, he referred to Cisco's "new product for the interconnection of storage with data networks."
  
  
• No more early-stagers. Echoing a speech earlier this year by Cisco CEO John Chambers, Carter said Cisco will pursue a more conservative approach to buying other companies (see Cisco's Appetite for Startups Shifts). "Look to 8 to 10 acquisitions over the next 12 months. I think our focus will be on smaller companies, where product is more mature or customer endorsed." He said size, geographic location, and the ability to be "immediately accretive" to Cisco earnings would also be factors in M&A this year.
  
  
• Guidance flat. Carter maintained guidance for the present quarter "flat to up slightly," but he warned that the following third quarter has been "traditionally very challenging" for Cisco.
  
  

— Mary Jander, Senior Editor, Light Reading
http://www.lightreading.com