Cisco’s software pivot leads to near-term layoff of 1,100 employees amid weak outlook

Cisco sign (flikr)
Cisco's latest job cuts come on top of the 5,500 layoffs the company announced in August 2016.

Cisco may have set a future course that will focus on software, but that migration process has prompted the routing giant to make a drastic change in the near term by cutting an additional 1,100 employees from its workforce.

These latest cuts, which are part of a broader restructuring plan that was announced during its third quarter fiscal year 2017 earnings (PDF), come on top of the 5,500 layoffs Cisco announced in August 2016.

While Cisco reported that the quarter’s revenues rose to $11.9 billion, the main concern for investors was the company’s fourth quarter outlook.

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Cisco said it expects revenues to fall 4% to 6% year-over-year in the fourth quarter, with earnings of 60 cents to 62 cents per share.

Analysts say that Cisco’s recent restructuring and its recent spate of acquisitions is in line with the company’s emerging software and cloud focus.

“Cisco’s headcount will decrease a net of less than 6,600 employees as TBR believes Cisco is largely retaining the talent brought in by its software acquisition spree and hiring in IoT, security, cloud, and analytics,” said Michael Soper, telecom analyst for Technology Business Research, in a research note. “TBR expects headcount reductions to primarily come from administration and hardware-focused R&D.”

Software M&A to continue

As Cisco retools its operations to focus more on a software-based future, the vendor has been hot on the acquisition trail, buying up companies with specialties in Artificial Intelligence (AI) and SD-WAN.

During the quarter, Cisco purchased two companies in the AI and SD-WAN arenas: MindMeld and Viptela.

By purchasing MindMeld, Cisco furthers its effort to incorporate AI into its own platforms. The vendor has been incorporating AI into its security, orchestration, application performance and collaboration products.

Chuck Robbins speaks at a Cisco event in this screencap.
Chuck Robbins

“Our intended acquisition of MindMeld will help us simplify and enhance the collaboration experience even further through the power of artificial intelligence and machine learning,” said Chuck Robbins, CEO of Cisco, during the earnings call, according to a Seeking Alpha transcript. “As chat and voice quickly become the interfaces of choice, MindMeld's AI technology will enable Cisco to deliver unique experiences throughout its portfolio.”

Likewise, Cisco is also seeing the value in building up its SD-WAN capabilities, a likely move governed by its key service provider customers' move to offer these solutions to their business customers. Unlike other point SD-WAN focused vendors, Cisco has taken a bundled approach for its IWAN offering that bundles multiple service elements.

“Software-defined WAN is a critical market transition and addresses the evolving customer demands and branch routing as a foundational block of executing in cloud networking,” Robbins said. “Viptela, combined with Cisco's IWAN technology, will provide an industry-leading cloud-first SD WAN platform that addresses the Edge networking needs of our most demanding customers.”

TBR said that it expects Cisco’s software buying spree will continue throughout the rest of the year as the company looks to seek new revenue sources outside of its cash cow hardware businesses.

“TBR believes Cisco’s acquisition cadence will continue at this rapid pace in 2017 with a laser-like focus on software-based acquisitions to drive Cisco beyond its reliance on switches and routers for revenue volume,” Soper said. “Software-mediated networking will gradually, but significantly erode Cisco’s revenue and margins in network hardware. The company aims to compensate for this by scaling up and building out its software portfolio to provide the intelligence necessary to run and derive business value from enterprise and service provider networks.”

Service provider weakness drives mixed results

Cisco reported mixed results across all of its segments with total product revenue flat year over year.

A key contributor to weakness across Cisco’s product revenues was mixed spending patterns from its U.S. and Mexico service provider customers.

“Cisco is also weathering weak service provider capex, as the vendor’s operator customers pull back or delay spending due to recently completed major projects, pending consolidation, or software-mediated networking initiatives,” Soper said.

Robbins said that Cisco saw varying global and United States service provider spending patterns.

“Our entire service provider business around the world is driven by very large customers and when a number of them have an off quarter, it can affect the business,” Robbins said “I think the Americas would be probably an example of that this quarter as well and the Mexico business is heavily influenced by service providers.

Robbins added that “we had some customers in the U.S. that were performed very well this quarter for us and others that did not.”

Here’s a breakdown of Cisco’s key metrics:

Switching: Switching revenues grew 2% to $3.49 billion, with solid growth in data center switching, driven by ongoing strength in the ACI portfolio which was rose 42%. Cisco said it also saw a slight positive growth in its campus business.

NGN Routing: Routing was $2.03 billion, down 2%, due to weakness in mobile packet core. 

Data Center: Data center revenues declined 5% to $767 million with the continued market shift from blade to rack. However, Cisco noted it is seeing solid traction with its HyperFlex hyper converged offering.

Security: Security was up 9% year over year to $527 million with strong performance in unified threat management. Cisco noted about 50% of growth as well as growth of over 30% in both advanced threat and web security.

Financials: Cisco reported third-quarter revenue of $11.9 billion. Net income on a generally accepted accounting principles (GAAP) basis was $2.5 billion, or 50 cents per share.