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Today will be the day to watch the share price of computer modem manufacturer Cisco (NASDAQ:CSCO). The company released it’s fourth quarter results for the year ending 27 July, reporting a profit of $2.27 billion, or $0.42 per share. This represents an 18% increase over the Q4 2012, during which the profit was $0.36 per share for a total of $1.92 billion.
Cisco’s share price is up a modest 0.21% on the day following such a glowing report that included increases in sales from both its hardware and it service divisions of 6.4% and 5.6%, respectively. Operating expenses decreased by 3.8%.
What we might be looking for, however, is an adverse reaction to the other announcement that the company issued today with the U.S. Security and Exchange Commission. That announcement was official notification of a new workforce reduction plan. The planned cuts will begin in the first quarter of fiscal 2014, which, for Cisco, is right now. Cisco estimates the one-off cost of the elimination of some 4,000 jobs will not exceed $500 million. The company has not yet stated specifically where those reductions will be. However, the fact that sales have been declining in Japan, China and Europe may provide a hint. Nearly 45% of Cisco’s business is transacted outside of the U.S.
CEO John Chambers seems to have a solid grip on the company’s restructuring plans that have been ongoing for nearly two years. Explaining why projections for the next quarter are now lower than originally anticipated, he said, “I’m real pleased with our momentum in the market – it’s just not growing as fast as we need.” Or, as the duffers say on the links, “At least you hit it closer to the hole.” He added that, “We have to very quickly reallocate the resources.”
When you look at Chambers’ plan, what he believes needs to be done, and what has already been done, the plan is quite aggressive. Whilst so many CEO’s slash their companies into oblivion and then call it good, Chambers appears to have a passion that is controlled by a plan, not a plan controlled by his passions.
His plan might better be described as a metamorphosis than a restructuring. The original consumer-oriented products that made Cisco the master of internet connectivity are not where Chambers sees the company’s future. When business leaders fail to understand what Chambers does, they end up still making the best doggone wagon wheels that money can buy, but they don’t understand why people are buying tires instead. Chambers intends to change the company’s direction to go to where the market is. He believes that is in the corporate sector where the demand for software and hardware for data centers is expanding rapidly.
One analyst sees Cisco in a situation where it has “eliminated low-hanging fruit and effectively managed their costs, but looking forward, the company must continually find ways to generate new sources of revenue.” That is precisely what we are saying that Chambers is doing. On the other hand, it is apparent that Chambers also believes that there is more low-hanging fruit to be picked. He has noted that “the company is still struggling with a bureaucratic structure in the middle ranks.”
That might be another hint about where those job cuts will be. That mid-level bureaucracy typically develops when job preservation becomes a cancerous priority for mid-level managers. The only practical way to eliminate that problem is to surgically remove it.
Just a final comment. Cisco’s transformation is not based upon a workforce reduction. That reduction is based upon good business sense. The company continues to evolve toward its new configuration with the acquisitions this past year of a security software company (SourceFire), an IT service management company (SolveDirect) and a data virtualisation company (Composite). Chambers keeps hitting the ball closer to the hole.
