Cisco To Cut $1 Billion In Expenses As Restructuring Continues

Cisco Systems plans to continue its restructuring campaign with more layoffs, cuts in underperforming business units and a plan to remove $1 billion in expenses heading into its fiscal 2012, Cisco's top executives said during the company's downbeat third quarter earnings call Wednesday.

"We know what we have to do," said Cisco Chairman and CEO John Chambers in his opening comments. "We have a clear game plan. We are a company with a track record of constant, market-shaping innovation. We've had to make big changes before and each time we've made these changes, we've emerged even stronger."

Cisco's third quarter results were slightly above expectations. For its fiscal third quarter, Cisco reported sales of $10.9 billion, up 4.8 percent from the $10.4 billion it reported in the year-ago quarter, and just ahead of Wall Street estimates of $10.86 billion. Gross margins fell to 61.3 percent from 63.9 percent a year earlier. Cisco's quarterly profit was $1.8 billion, down 17.6 percent from the year-ago quarter profit of $2.2 billion.

Cisco will continue to see some weakness in its fourth quarter as its corporate restructuring continue and Cisco continues "hard work behind the scenes," Chambers said. Specifically, Cisco expects fiscal Q4 revenue to be between flat and up 2 percent from a year ago, which would put the figure in the $10.84 billion to $11.02 billion range and below Street estimates of $11.67 billion.

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In his comments, Chambers struck a notably different tone than the optimistic, cheerleading persona regular Cisco observers are used to. He also backed off Cisco's often-described annual growth targets of 12 to 17 percent.

Cisco has gone on the defensive following several quarters of disappointing earnings reports and steady declines in businesses such as switching and consumer products. Among a number of recent Cisco headaches, the company has seen ongoing, high-profile executive departures as it changes its corporate structure.

In April came a candid memo from Chambers admitting that Cisco had disappointed investors, confused employees and lost credibility in the marketplace, portending changes ahead for the networking titan.

Some changes have already happened. In recent weeks, Cisco shuttered its Flip video camera business as part of a restructuring of its consumer unit, and confirmed organizational changes that included cutting down on Cisco's much-maligned structure of internal boards and councils.

More changes are coming, according to Cisco's top executives. Cisco recently launched an early retirement program for eligible CIsco employees, similar to one Cisco provided in 2009. There will also be layoffs.

"We do anticipate a workforce reduction affecting both our full-time and contractor workforce," said Gary Moore, who was named Cisco's chief operating officer in Feburary, and was making his first appearance on Cisco's quarterly earnings conference call.

NEXT: Cisco's Strengths, Weaknesses In Q3

Cisco's third quarter was a similar story to its fiscal second quarter: notable declines in switching, public sector and other areas where Cisco has been weakening in the past year, and gains in collaboration, data center and services.

Cisco's core switching and routing business, which together account for a little less than half of Cisco's overall revenue, continue to struggle. Routing saw a 7 percent increase year-over-year, but switching declined 9 percent.

Asked by analysts about weakness in switching, Chambers admitted that CIsco will continue to see a number of competitors from "a lot of different directions," including, he said, "HP and Huawei on price." Chambers also reiterated that the switching market is in significant transition and that price-per-port is falling, creating short-term pressure on revenues.

Public sector is another area where, according to Chambers, Cisco must "adjust quickly." Public sector accounts for about 20 percent of Cisco's overall business, but while the segment was on a 30 percent growth rate four quarters ago, Cisco saw a decline of 8 percent in orders, year-over-year, for Q3.

There were myriad bright spots. Collaboration, which includes Cisco's videoconferencing portfolio, grew 39 percent year-over-year, and data center virtualization and cloud grew 31 percent. Cisco's Unified Computing System (UCS), which has been a hit for Cisco since debuting more than two years ago, now boasts 5,400 customers following a gain of 1,570 customers in the third quarter, and now has an annualized run rate of $900 million, Chambers said.

Total global enterprise sales grew 12 percent year-over-year, and commercial sales, which is what Cisco calls midmarket and small business, grew 2 percent. Cisco's services business, which accounts for 20 percent of total revenue, grew 14 percent overall.

As for the changes to its structure of boards and councils -- put in place by Chambers about five years ago -- Cisco has reduced its number of councils from nine to three, and its boards from 42 to 15. Neither Chambers nor Moore committed that Cisco would exit the board and council structure entirely.

"The headline is we've changed the way we're operating," said Moore, who said the rearranged corporate structure will drive "simplicity and agility into the organization."

Chambers called out members of his team for a job well done and trumpeted several areas of growth for Cisco, but overall his choice was to highlight areas where Cisco needs to improve rather than where it has thrived.

Said Chambers in his closing comments: "The buck stops here. It's my responsibility. I get it."