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Cisco Systems CEO John Chambers defended his plan to cut 6,000 jobs, calling it a necessary response to a changing market for networking gear and shifting demands in markets around the world.
In an interview with Re/code following the company’s quarterly earnings report Wednesday, Chambers said he expects Cisco’s total head count to be about the same at this time next year as it is now — about 74,000 — despite the cuts. And though the cuts will be painful for those who lose their jobs, they’re necessary, he says, if Cisco is to exploit new, faster-growing markets like cloud computing, security and software while keepings its costs about where they are now.
“Our head count won’t vary dramatically after these changes,” Chambers said. “This is not a cost exercise, this is about investing for growth.”
Still, the job reduction is the largest Cisco has announced since 2011, when it trimmed its workforce by 6,500, beginning a series of restructuring moves that have included an annual bloodletting every summer. In 2012 it cut 1,300, and last year it cut 4,000.
Yet despite the cuts, Cisco’s head count has tended to grow, increasing in three of the last five fiscal years (see table below). Part of that can be attributed to acquisitions. For instance, in 2012, Cisco spent $5 billion to acquire the Israeli video software firm NDS, which employed 5,000 people around the world.
This restructuring will be “limited,” Chambers said. “Certain areas will be hit pretty heavily and others won’t be affected at all. But we’re moving to fund our growth in all those new markets,” specifically cloud computing, data center, security and software. “If you’re going to keep your expenses flat, you have to make these tough moves.” The IT market is in a phase of rapid change, Chambers said, and as he sees it, there’s simply no other way to respond.
Indeed, Cisco’s results bear this theory out. Long the predictable powerhouse that supplied corporations and service providers with the industrial-strength gear they needed to maintain their data connections, Cisco’s traditional businesses have been in a state of consistent decline. Its biggest business, switching, which accounts for 30 percent of revenue, declined year on year to $3.7 billion, down four percent. Routing, which accounts for 16 percent of sales, fell seven percent to $1.9 billion.
Sales to the data center grew 30 percent but accounted for only $772 million in revenue during the quarter or about six percent of sales. Security grew by 29 percent, but amounted to only $447 million or about four percent of sales.
Sales in global markets also suffered, led by Asian markets, which fell seven percent. The Americas and Europe both increased by about two percent, led by the U.S., which grew five percent, and Germany, which grew 16 percent.
Much of the difficulty in global markets, Chambers said, could be attributed to economic weaknesses in those countries or “geopolitical” factors: Conflicts in the Middle East and Ukraine and political upheaval in countries like Thailand and Brazil. Emerging markets, once a Cisco strength, are not expected to recover anytime in the near future.
One factor that hasn’t hurt Cisco’s results, he says, was the allegation made in a book based on documents leaked by Edward Snowden concerning supposed back doors being installed in Cisco-made gear. The documents, which included photos, alleged that the U.S. National Security Agency had intercepted equipment from Cisco and other manufacturers while in transit and loaded them with surveillance software. The photos, which were never independently verified, appeared to show NSA technicians working with Cisco equipment. Cisco is not said to have cooperated in the NSA’s efforts, and Chambers reiterated that during the interview.
Nevertheless, the revelation prompted Chambers to write a letter to President Obama in May warning of an erosion in the confidence of U.S.-made technology products around the world. He asked Obama to set “new standards of conduct” for how the NSA performs its operations around the world.
“Do most countries trust us? The answer is yes. And you have to earn that trust on an ongoing basis. But the issue has had very little impact on sales except in maybe one or two countries,” he said. “I just wish the pictures had shown them working on a Huawei box or an HP box,” he said, chuckling.
Whatever the case may be, investors appear not to like what they see and have been selling Cisco shares today. The shares fell by nearly three percent within the first half hour of trading on the Nasdaq to $24.46. The shares have risen by nine percent since the start of 2014.
It’s at this point that I usually pick a song to characterize Cisco’s earnings. What started as a little joke between Chambers and me a few years ago has become a recurring tradition. This quarter, I selected David Bowie’s “Changes.” Chambers says Cisco’s upcoming cuts are due to fast-moving changes in the marketplace. It seemed a good fit for the quarter. Time may change Cisco, but can Cisco trace time? We’ll see.
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