Cisco Systems Inc. (CSCO:US) Chief Executive Officer John Chambers’s turnaround effort is sputtering as a revenue forecast falls short of estimates and the company resorts to a second round of job cuts this year.
Facing weaker sales outside the U.S., the biggest maker of networking equipment is cutting 4,000 jobs, or 5 percent of the workforce, underscoring the pressures facing the company’s core businesses and profit margins from competitors including Huawei Technologies Co., Juniper Networks Inc. (JNPR:US) and Hewlett-Packard Co. (HPQ:US)
After almost two decades at the helm of the San Jose, California-based company, Chambers is now looking for a successor while seeking to leave the legacy of a healthy company. Over the past three years, Cisco has spent $10.6 billion buying 59 companies, branching into software and security as its existing networking products become increasingly commoditized. The job cuts and outlook suggest that the efforts are still far from paying off, said Bill Kreher, an analyst at Edward Jones & Co.
“Cisco has eliminated low-hanging fruit and has effectively managed their costs, but looking forward the company must continually find ways to generate new sources of revenue,” said Kreher, who is based in St. Louis and has a hold rating on Cisco shares. “The guidance is below the long-term plan, which can be concerning.”
Cisco fell 7.2 percent to $24.49 at the close in New York, the biggest decline since May 2012. The stock has advanced 25 percent this year, compared with a 16 percent gain for the Standard & Poor’s 500 Index.
The latest cuts to Cisco’s workforce of 75,000 were taken after weaker sales in Japan, China and Europe weighed on revenue growth, Chambers said on a conference call yesterday. Some of the reductions would come from management, he said.
“I’m real pleased with our momentum in the market -- it’s just not growing as fast as we need,” Chambers, who has been CEO of Cisco since 1995, said on the call.
Revenue for the current quarter through October will be $12.2 billion to $12.5 billion, Cisco said in a statement yesterday. Analysts on average were projecting sales of $12.5 billion for the current period.
While Cisco is benefiting from growing use of Web video and mobile devices that strain data networks and require the purchase of more routers, switches and servers, that hasn’t been enough to make up for weaker sales outside the U.S. Slower world economic growth impacts Cisco because the company gets 42 percent of its sales outside the U.S. and Canada, according to data compiled by Bloomberg (CSCO:US).
Profit excluding some items was 52 cents a share in the fiscal fourth quarter, while revenue rose 6 percent to $12.4 billion. Analysts on average had projected profit of 51 cents and sales of $12.4 billion, according to data (CSCO:US)compiled by Bloomberg.
With the new cuts, Cisco will have eliminated 12,300 jobs over the past two years as it has exited consumer businesses while focusing on corporate software and technology services. The company announced the elimination of 500 jobs in March.
Net income rose 18 percent to $2.27 billion, or 42 cents a share, from $1.92 billion, or 36 cents, a year earlier.
“If there’s something wrong somewhere in Cisco, given how well things have been going, investors would expect Cisco to make up the difference somewhere else,” said Jayson Noland, an analyst at Robert W. Baird & Co. in San Francisco who has an outperform rating on the stock, the equivalent of a buy.
Cisco also faces increased competition from companies including Palo Alto Networks Inc. (PANW:US) and Arista Networks Inc. and margins are narrowing. Gross profit margin in the just-ended fiscal year was 61 percent, down from 70 percent a decade ago.
Another reason for weaker profit growth and margins is Cisco’s entry into the computer-server business, where prices and margins are lower. It’s also expanding into computer security, where Cisco faces specialized competitors with advanced technologies. In July Cisco agreed to buy Sourcefire Inc., a maker of anti-hacking technology used by the U.S. government, for $2.7 billion. Sourcefire competes with companies such as Palo Alto Networks and Fortinet Inc. (FTNT:US)
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