Forecasting a significant drop in revenue for the fourth quarter, a J.P. Morgan analyst today reported that Cisco Systems Inc. “could” soon announce a workforce reduction of 10%, which would be equal to about 6,600 employees.
The analyst, Ehud Gelblum, said a 10% reduction would save the networking company about $900 million a year.
“We expect Cisco to guide fourth fiscal quarter revenue down 17-22%, year over year, as demand continues to deteriorate, in-line with our estimate for a 21% year over year decline,” Gelblum wrote in his 49-page first-quarter 2009 preview of communications equipment and networking companies. Cisco's fourth fiscal quarter ends July 31. “We believe Cisco could also announce a 10% headcount reduction, which we calculate could save $900M annually,” he wrote.
The dismal sales outlook for Cisco, and the possibility of layoffs, comes as two Cisco competitors, Juniper Networks Inc. and F5 Networks Inc., recently lowered sales projections, citing a drop in purchases of networking equipment by their customers.
Gelblum said that both Juniper and F5 were able to increase their earnings-per-share expectations despite expected revenue declines because they had made aggressive cost cuts.
Gelblum said his favorite stocks for the longer term in the sector are those of Motorola Inc., Qualcomm Inc., Ciena Corp. and F5. He favors them because of a combination of factors, including product growth and aggressive cost-cutting.
Cisco is expected to offer guidance for its fourth fiscal quarter when it announces its third-quarter results in a conference call May 6. The company has about 66,000 employees.
A Cisco spokesman declined comment on the J.P. Morgan report directly but noted that Cisco officials in February discussed a “limited restructuring” that could lead to 1,500 to 2,000 job reductions companywide in the “near term.”
The spokesman said the 1,500 to 2,000 jobs “do not represent a broad-scale layoff in our workforce…. This limited restructuring is part of our ongoing, targeted realignment of resources. While Cisco constantly manages its business priorities, resources and overall employee alignment as part of our overall business management process, we are sensitive to the impact these decisions have on employees during this challenging economic environment. We are doing everything possible to minimize the impact on employees affected by the limited restructuring.”