Cisco Systems Inc. said it was laying off 9 percent of its workforce and transferring another 7 percent to a company it plans to sell. After making the announcement, shares of the technology giant rose as many analysts welcomed the painful, but necessary reduction to make the company more competitive.
Of the 6,500 jobs that are to be eliminated, 2,100 are employees who took part in a voluntary early-retirement program. Cisco is also moving another 5,000 jobs to Foxconn Technology Group that it plans to spin off.
As of the end of April, the company had 73,400 employees.
“The cuts are drastic and could have a near-term negative impact, especially on morale,” Wedbush Morgan analyst Rohit Chopra said in a note. “However, we see this as an important long-term adjustment to a business model which had little leverage and was in danger of becoming less competitive.”
Cisco’s goal to cut $1 billion in annual expenses leads analyst to believe its fourth quarter expenses would be around $4.2 billon, up from third quarter by about $200 million and even higher than the fourth quarter of 2010 by more than $350 million, noted George Notter of Jefferies & Company.
A company spokesperson said the 9 percent reduction is sufficient to reach their goals.
Notter sees Cisco’s problem as being one focused too much on growth in a maturing business environment.
“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 wrote in his Tuesday morning report.
But Cisco’s problems may not be over.
In April, CEO John Chambers admitted that Cisco’s recent entry into consumer products and video and social software had caused the company to lose focus. As a result, Cisco’s stock drop to a 52 week low of $14.78 from a high of $26.00.
“They’re a pretty heavy organization as far as staffing goes, and Chambers made it very clear they need to cut expenses,” analyst Zeus Kerravala told Light Reading. As for the early retirement packages Cisco extended, “People who could retire before can’t now,” noted Kerravala.
If there is a silver lining for the Cisco employees who were laid off it is that much of technology is hiring, especially in the engineering roles.
But whether the latest cuts will be enough to get Cisco back near the top is anyone’s guess.
“With all the problems at Cisco, investors may be taking a wait-and-see approach on the stock,” RBC analyst Mark Sue told The Street.