Reeling from the financial impact of the COVID-19 pandemic, Cisco last week said it would implement a US$1 billion cost-cutting plan that will not only translate to layoffs but the tech giant‘s potential exit from unprofitable IT markets, partners told CRN.
Cisco said last week that revenue for its most recent quarter had declined across nearly every segment, save for security. The company also made a surprise revelation that Kelly Kramer, Cisco‘s CFO since 2015, would be retiring.
Cisco CEO Chuck Robbins told investors that the company would be transitioning the majority of its portfolio to an as-a-service model in keeping with the ways customers are interested in consuming technology in a pandemic and post-pandemic world. At the same time, Cisco plans on cutting out more than US$1 billion on an annualized basis to reduce its cost structure.
Specifically, the San Jose, Calif.-based tech giant‘s cost restructuring plan includes a voluntary early retirement program that will offer estimated pretax charges of approximately US$900 million, consisting of severance and other one-time termination benefits, among other costs, according to Cisco.
“Cisco lays off people every year -- usually in August. Though, the cuts will probably be a little deeper this time,” said one Cisco MSP that requested anonymity.
The company expects to gain US$800 million with these changes in place in the first quarter of Cisco‘s fiscal 2021, which ends in November. The remaining amount will be recognized during the rest of the fiscal year, Cisco said.
“I‘m always concerned when one of my vendors is having layoffs,” said another longtime Cisco solution provider partner that asked not to be named. ”Certainly, I question whether response times will be the same.”
Cisco partners believe that while some cuts will be in the form of layoffs, other cuts could come from weakening or unprofitable product lines.
“I would expect Cisco will have to look at product lines and de-invest in some of the lines that aren‘t seeing traction. If I were [Robbins] or [Kramer], I’d be looking at what is selling and if Cisco should exit certain markets,” an executive for the MSP said.
Still other cuts could come from everyday business costs, such as real estate and utilities, as well as travel budgets, partners said. Cisco‘s large campus at its headquarters in San Jose, California, is largely going unused. The company in March issued a mandatory work from home order affecting the main campus, as well as several of its other U.S. offices, including San Francisco, New York City, and all of Washington State. The policy also extends outside of the U.S. to Cisco offices in China, Italy, South Korea, and Australia. Cisco said that employees are encouraged to work from home through 2020.
Cisco in June put on a Cisco Live 2020 digital event and the company has changed its annual in-person U.S. Partner Summit scheduled for November to a virtual event in 2020.
“If you look at the US$1 billion they want to cut, a lot of their travel expenses have dropped to zero. They‘ll continue to restrict travel and entertainment. It could be a huge financial boon for their business,” an executive for the solution provider said. ”I would expect that their physical footprint is also low-hanging fruit.”
Robbins said that the early retirement program will help align the company around emerging priority areas. “We‘re going to re-balance our R&D investments to focus on key areas that will position us well for the future,” Robbins said, calling out cloud security and cloud collaboration, as well as developing solutions for education and healthcare.
One day after reporting its most recent earnings, Cisco logged its worst one-day stock drop in nearly a decade, which fell as much as 12 percent last Thursday morning. The stock hasn’t rebounded since then but was up slightly on Wednesday morning to US$42.17.
For the fourth fiscal quarter that ended June 30, Cisco‘s revenue declined 9 percent to US$12.14 billion from US$13.43 billion in the year-ago quarter, with earnings per share declining to 80 cents on a non-GAAP basis. Cisco’s net income declined 5 percent year over year, falling to US$3.39 billion from US$3.59 billion year over year.
Cisco‘s product revenues fell 13 percent year-over-year in Q4 2020, while services revenues were flat.