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Did Cisco Cut Deep Enough?

Craig Matsumoto
7/19/2011
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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

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ycurrent
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ycurrent,
User Rank: Light Beer
12/5/2012 | 4:58:46 PM
re: Did Cisco Cut Deep Enough?


Improving Cisco the company vs. Cisco the stock seem to be on separate paths:


"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,"


Would Wall Street really be pleased with more significant dividend policies? Is Cisco a slow growth company due to its size or its lack of focus/execution in strategic growth markets?

akvasu
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akvasu,
User Rank: Light Beer
12/5/2012 | 4:58:45 PM
re: Did Cisco Cut Deep Enough?


Often I wonder how many of these analysts actually thing from the Employee point of view - Does only the stock value matter? What about the Employees!


The company is doing well, it has a deep cash reserve too. Its taking drastic steps mostly because people are focussing only on the money they might make, rather than the money the Employees need to make! I'd like to see the stock holders getting laid off somplace instead of employees!

Rush21120
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Rush21120,
User Rank: Light Sabre
12/5/2012 | 4:58:44 PM
re: Did Cisco Cut Deep Enough?


Cisco's slow growth is due to the lack of new catalyst product revenues.  Most of the older product family lines are firing but new ones haven't  in the past 2 yrs.  Cisco needs to return to it's core business instead of M&A.   The challenge Cisco has is that it already let allot of its core talent for R&D go long ago. 

crazy4geek
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crazy4geek,
User Rank: Light Beer
12/5/2012 | 4:58:42 PM
re: Did Cisco Cut Deep Enough?


6,500 (which includes the 2,100 Early Retirment)


5,000 - sold off to FoxConn


500 - flip


====


12,000 people + whatever cuts happen in the ROW in next Quarter.


 


Pretty deep cuts I'd say and banking on the fact that Cisco isn't done - I bet they'll do more in Q1.

crazy4geek
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crazy4geek,
User Rank: Light Beer
12/5/2012 | 4:58:41 PM
re: Did Cisco Cut Deep Enough?


RE: Would Wall Street really be pleased with more significant dividend policies? Is Cisco a slow growth company due to its size or its lack of focus/execution in strategic growth markets?


 


A big part of the problem is their size.  To expect $40B company to grown double digits year over year isn't possible organically.  That would be like adding a company the size of Juniper to it's growth each year.  Not possible, organically at least.  I think the company need to reset Wall Street expectations or the layoffs will just continue until there isn't enough intellectual property to sustain the company.

crazy4geek
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crazy4geek,
User Rank: Light Beer
12/5/2012 | 4:58:41 PM
re: Did Cisco Cut Deep Enough?


In response to akvasu - Right on!


The problem is workers report to their management but the execs report to Wall Street, so the employees have been, are and will continue to be the sacrificial lambs.

ycurrent
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ycurrent,
User Rank: Light Beer
12/5/2012 | 4:58:41 PM
re: Did Cisco Cut Deep Enough?


Here's the problem with the "large number" or too big to grow excuse.


Do you think there is $4-$6 billion of growth in the markets where Cisco plays every year? If the answer is yes, then Cisco's problem is execution and ability to capture more share from all its key market areas.  If the answer is no, then Cisco should not be focused on those markets.

crazy4geek
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crazy4geek,
User Rank: Light Beer
12/5/2012 | 4:58:40 PM
re: Did Cisco Cut Deep Enough?


I think the problem has been too many adjacencies.  But you still can't negate the fact that growing double digits was much easier as a smaller company then when $40B.  There is an excellent book titled " Stall Points" I highly recommend it!

gtchavan
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gtchavan,
User Rank: Light Beer
12/5/2012 | 4:58:40 PM
re: Did Cisco Cut Deep Enough?


Why is Google developing its own hardware? 

crazy4geek
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crazy4geek,
User Rank: Light Beer
12/5/2012 | 4:58:39 PM
re: Did Cisco Cut Deep Enough?


Ahh, didn't say it was gospel - just a good, interesting read ;)

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