On the heels of its Q4 earnings on Wednesday, Cisco suffered its worst day on the stock market in 11 years on Thursday. Naturally, there was a flurry of analyst and investor activity on Thursday following Cisco CEO Chuck Robbins announcing the company was embarking on a restructuring plan that includes voluntary early retirement program and layoffs.
The restructuring plan started in the current quarter and is expected to recognize a related one-time charge of about $900 million. Over the next few quarters, Cisco will be taking out over $1 billion on an annualized basis to reduce its cost structure, which could be a boon to rivals such as Arista Networks and Juniper Networks.
CFO Kelly Kramer's surprise retirement announcement on Wednesday may have given investors and analysts even more agita, but Kramer is staying on board until a replacement is hired.
Robbins noted on Wednesday's Q4 earnings call that he has now been at the helm of Cisco for five years after taking over for the ever-enthusiastic John Chambers. Clearly, Chambers has his work cut out for him going forward.
The impact of coronavirus pandemic came home to roost for Cisco in the fourth quarter. Overall orders were down 10% in the fourth quarter, with commercial orders, which includes SMBs, were down 23%. Cisco also said it expects revenue to be down from 9% to 11% in the current quarter while some analysts had projected 7%.
“As you would expect, the pandemic has had the most impact on our enterprise and commercial orders, driven by an overall slowdown in spending,” said Robbins, according to a Seeking Alpha transcript. "We are seeing customers continue to delay their purchasing decisions in certain areas, while increasing spend in others until they have greater visibility and clarity on the timing and shape of the global economic recovery."
Cisco's 400G customers have been more focused on the impact of Covid-19 on their networks' capacity rather than building out new services and applications. While this year has mostly been about trialing 400G gear, Cisco should get a bump from broad 400G deployments next year.
In addition to 400G, Robbins said Cisco would focus on the following areas, many of which have been accelerated by the Covid-19 pandemic: multi-cloud investment; 5G and Wi-Fi 6; optical networking; next-generation silicon.
Going forward, Cisco's Silicon One chip, which is a unified silicon architecture that can work anywhere in the network, will have more time to gain traction in the market along with its new 8000 series routers that use its IOS XR7 operating system.
On the optical front, Cisco's $2.6 billion deal to buy coherent optics company Acacia Communications needs to clear one more hurdle with the State Administration for Market Regulation of the People’s Republic of China (SAMR) before it can close.
On the plus side, Cisco is gaining ground on transitioning to a more software and subscription based revenue model.
"At our Financial Analyst Conference in 2017, we laid out key metrics for our transformation," Robbins said. "We set a goal of 30% of our revenue to come from software. And while we achieved 29% in fiscal year 2020, we did achieve 31% in Q4. We also delivered 51% of our revenue from software and services in FY 2020, exceeding our target of 50%. Lastly, we now have 78% of our software revenue sold as subscription, beating our target of 66%."
While Cisco plots its comeback, it remains to be seen what the impact of Cisco's cost-cutting measures will have on vendors, such as Celestica, that rely on Cisco for part of their revenues.
It may be the dog days of summer for Cisco, but it does have the wherewithal to buy into areas, such as cloud, that are more promising. Robbins said Cisco would focus its R&D efforts on cloud security and cloud collaboration going forward, and away from the on-premise aspects of its portfolio.
While Cisco's business customers may not be sending their employees back in droves to office spaces and branch locations, Cisco has a broad enough portfolio to shift to "work from anywhere" going forward.
Lastly, enterprises will go back to spending with Cisco at some point. Due to Covid-19, a large chunk of enterprises are now accelerating their digital transformations. — Mike
Editor's Corners are opinion columns written by a member of the Fierce editorial team. They are edited for balance and accuracy.