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Optical/IP

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
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mha101 12/4/2012 | 10:51:09 PM
re: Cisco CFO: More Cuts Needed in civilized language this is called capitol'izm -
management sucking the employees till the last drop and then throwing (kicking) them off like
used condoms.
optimight2002 12/4/2012 | 10:51:15 PM
re: Cisco CFO: More Cuts Needed Well you have a bunch of inexperienced arrogant guys running the business. What do you expect? How many M&A's did they do 1999-2000 and how many of them actually worked? How many dollars were wasted on the M&A? The thing that surprises me is that the top level management must be very weak if they promoted the guys who actually brought about the downfall of their business.
skeptic 12/4/2012 | 10:51:23 PM
re: Cisco CFO: More Cuts Needed
I would put it a little differently.

At a certain point in the 1990's, cisco had
stumbled its way into effectively having a
monopoly position. When they reached that point,
they started to lose focus on customers and
instead re-engineered the whole business around
predictable (and growing) quarterly results
regardless of the long-term impact on the
company or its customer relationships.

Cisco treated certain customers so badly that
they permanently hurt their status at accounts
which by all rights should have been theirs.

Repairing the damage seemed to be beyond the
ability of certain people at cisco, so rather
than even try, they start refocusing on markets
where customer relations and quality don't
matter as much. Of course these markets are
also lower-margin, which significantly changes
the sort of engineering staff and budget that
the company can afford to support. The stock
goes down and they have to shrink headcount to
match their new reality.

The other thing is the barrier to competition
in enterprise isn't all that high and that their
name/branding doesn't mean much for sales.

But cisco's size and financial power do still
mean alot in the enterprise space.




temporary 12/4/2012 | 10:51:24 PM
re: Cisco CFO: More Cuts Needed

During the speculative bubble of 1996 - 2000, Cisco built a business plan on public service providers and a high stock value. They felt they could continue with increasing wage demands, find increased margins in higher speed, high capacity networks. They did not see growth in the lower margins and increased competitiveness of enterprise markets. They felt that importing technical engineers would put some pressure on Silicon Valley wages, hence they continued to concentrate their activities H1-B visas. Cisco wanted to concentrate activities in Silicon Valley, mainly to satisfy second generation managers who wanted to build their own empires in their own backyards.

By 1999, it was clear that the growth in consumer Internet connections had stopped, the major loans owed by National Carriers to equipment vendors was exposed, and both major carriers and equipment companies began a free fall in stock price and earnings.

Now Cisco has reduced head count, fired most of the managers who mishandled the service provider market, and refocused on the enterprise market.

They made a couple of errors in thinking. Many of the laid off technical engineers are returning back to their home countries and competing with Cisco for the local enterprise markets. Cisco cannot use a rising stock price to reward workers and lower wage demands, (Cisco stock has lost 20% in value since they reevaluated stock options). Finally, network technology in the enterprise had been incorporated into public standards, with multiple (often foreign) sources for the code, and Linux based enterprise networking is infiltrating into the routers. Yet, Cisco is still stuck with second generation managers having wages way above performance, and unable to survive in the new competitive environment of the enterprise. The final shot in the head is their inability to use financial engineering to mask these problems over the medium term.
innocent_bystander 12/4/2012 | 10:51:25 PM
re: Cisco CFO: More Cuts Needed I believe all managers at some level are being told they need to cut their bottom 5%. Having been an insider at one time (before getting laid off myself), the process is handled by ranking everone across the whole company and then slicing off the bottom 5%. Some managers will be successful at "highly ranking" their employees such that no one in their organization gets cut, however, this game can only be played so much (ie if all managers try to overrank their employees, then eventually someone ends up on the bottom 5% list).

Last check, I had only heard of 1 or 2 engineers being affected in Dallas on the last go round.

blosox 12/4/2012 | 10:51:25 PM
re: Cisco CFO: More Cuts Needed
It's too bad these things are handled like on Survivor.
theanswer 12/4/2012 | 10:51:30 PM
re: Cisco CFO: More Cuts Needed Are these cuts happening in certain regions of the country? How about Dallas Area?
innocent_bystander 12/4/2012 | 10:51:30 PM
re: Cisco CFO: More Cuts Needed My inside sources say the "5%" cull is occurring on at least a quarterly basis, if not more often.

A tap on the shoulder and trip down to HR is all of the warning you get. "Take the package or else".

Really sucks for moral.

theanswer 12/4/2012 | 10:51:31 PM
re: Cisco CFO: More Cuts Needed What drag these numbers down ($/emp) are the many employees that do not invent, design and write code for product. In any company you have the forward thinkers that understand or talk to customers and come up with product strategy (i.e. products and M&A). In some cases they choose wrong. In less frequent senerios the non- technical employees save the company money by means of process improvement and being effecient at their jobs. Rarely do these things save enough money to bring the $/emp. to the amounts that companies seek. Now I'm not saying these employees are worthless. In fact infrastructure is very important to the manufacture and paper trails neccesary to run a company. Therefore these employees depend heavily on the product's success (i.e. sales). If products are not feature competitive or are priced wrong then they die off as does the support personel for those lines. By streamling those processes by automation and consolidation of job fuctions to fewer support pesonel without loss to quality then $/emp. numbers go up more rapidly. Everyone in the company can not make 100K a year unless profit margins or volumes are extreme. During the boom many non-technical positions and support positions grew to fast in terms of salary and numbers per product lines. There needs to be a thinning of those managers and support personel until those products come back in volume or new products come online.
brahmos 12/4/2012 | 10:51:32 PM
re: Cisco CFO: More Cuts Needed csco has a revenue/emp of about 550k now, dn
from 700k in 2000. is this right?

can anyone post current quarters figures for
NT, LU, JNPR, riverstone, unisphere, Alcatel,
marconi, foundry, ericsson and nokia ?
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