Networking giant Cisco (CSCO) is not only one of the most important tech companies in the U.S. with a market cap of $94 billion, it is also one of the 30 stocks that makes up the Dow Jones Industrial Average. It has earned that right because of stellar results throughout the years. But for the first time since John Chambers took the CEO job in 1995, the tech firm is in real trouble. Part of its way out will result in the layoffs of 4,000 to 5,000 people which is part of a plan to cut $1 billion in costs per year.
Will it work? The expense plan is critical to Cisco’s short-term future. It is a finger in the dam meant to help the firm’s PL while it restructures and sheds some of its businesses, many of which it has bought over the last decade.
The cost cuts may not be enough to fool Wall Street. A number of analysts downgraded Cisco almost immediately after its earnings release. The company made $1.8 billion in net income on $10.9 billion in revenue in its fiscal third quarter. Net income fell 17% as revenue ticked 4% higher. On an annualized basis, the consensus is that Cisco will make about $5 billion this year.
Even if Chambers takes $1 billion in expenses out of Cisco, investors will immediately want to know what the next chapter in his turnaround strategy will be. Not much was said about it on the company’s earnings call. The cost cuts may help the bottom line, but probably not enough for earnings to move higher than they were last year. And if more cuts are needed in the future, it may risk the ability of Cisco to compete in some of its core markets.