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Cisco plans to respond to significant revenue declines with deep cuts in operational expenses, a realignment in research and development spending, and an accelerated shift to selling products as a service, including its traditional networking hardware.
The Cisco restructuring stems in part from the dramatic market changes brought on by the COVID-19 pandemic. Business demand has shifted toward technology to support remote workers and manage applications running in multiple cloud environments, rather than in private data centers.
Along with changing priorities, Cisco customers have also reduced spending, particularly in the U.S., where regions struggle to reopen their economies while the virus spreads. The company reported this week that revenues fell 9% year-to-year to $12.15 billion in the previous quarter ended July 25. For the current quarter, the first of the 2021 fiscal year, Cisco forecast a decline of between 9% and 11%.
Cisco's response is a $1 billion cost reduction, with 80% coming from operational expenses, CFO Kelly Kramer told Wall Street analysts. Those cuts would occur over the next five months.
Kramer and CEO Chuck Robbins, also on the conference call, did not mention layoffs. However, Kramer told business site MarketWatch that the first phase of cuts would be voluntary retirement offerings. After that, the company would consider other moves to reach the $1 billion mark.
Those other moves are likely to include job cuts, said analyst Patrick Moorhead at Moor Insights & Strategy.
R&D overhaul part of Cisco restructuring
Cisco said it would lower expenses by shifting R&D spending to parts of its portfolio with rising sales. Those areas include cloud-based collaboration, integrating cloud security and software-defined WAN, and software related to application performance and network automation.
"Those are, in fact, what we're seeing as hot areas," said Roy Chua, founder of research and advisory firm AvidThink.
Chuck RobbinsCEO, Cisco
Cisco customers want to buy more technology as a service, so the company will accelerate the number of products it offers through subscription, Robbins said. The company plans to release more of those offerings by the end of the year.
"Literally, we're looking at everything," Robbins said. "We're even looking at how we deliver our traditional networking hardware as a service over time."
Customers will scrutinize the value of the pricing change, Gartner analyst Andrew Lerner said. For example, companies were unhappy with the subscription licenses Cisco offered with its Catalyst 9000 campus switches, released in 2017.
"We received complaints from customers that this increased the total cost of ownership without delivering enough value to justify it," Lerner said.
If Cisco offers subscription-based pricing "purely as an alternative pricing mechanism, I suspect it would be well received," Lerner said. However, if Cisco uses the shift to generate more revenue while delivering roughly the same functionality, "many customers will probably be unhappy."
Biggest drop in infrastructure business
The steepest decline in spending last quarter was in Cisco's infrastructure platforms product category, which includes the company's networking hardware. Revenue fell 16% to $6.63 billion. Revenues from applications, including Cisco's cloud collaboration portfolio, fell 9% to $1.36 billion, while security increased 10% to $814 million.
Within the U.S., top-tier enterprises spent more on technology during the previous quarter. But small enterprises and medium and small companies cut back, Robbins said. "As you go down in the marketplace, the weakness got a little bit worse."
Robbins did not see any signs that the pandemic's impact on businesses in the U.S. was waning. "It feels to me very much like it felt 90 days ago," he said.
Outside the U.S., countries where demand was up in the previous quarter included Japan, Korea and Germany, which have done a much better job at controlling the spread of COVID-19. Cisco's European sales teams "feel reasonably OK, not great-great, but better than they did 90 days ago," Robbins said.
The valuations of many tech companies have fallen during the pandemic, so Cisco could acquire companies to bolster its portfolio. The company has a list of potential targets, Robbins said.
"There has to be a recognition that the valuations have changed, but we'll try to be disciplined and do the right thing at the right time," he said.
Along with fiscal fourth-quarter results, Cisco announced the retirement of Kramer, who agreed to stay with the company until it found her replacement. Kramer told MarketWatch that her departure had nothing to do with Cisco. After 30 years in the business, "it's just time," she said. Kramer has been with the company for eight years.