• As expected, Cisco is cutting thousands of jobs
• But it has also lowered its full fiscal year sales outlook, and that wasn’t anticipated
• The news hit Cisco’s stock and spells bad news for other vendors

As anticipated earlier this week, Cisco used its fiscal second-quarter earnings webcast to announce a 5% reduction in its workforce, a move that will result in the loss of more than 4,200 jobs at the networking equipment giant. It also lowered its full fiscal year revenues target to between $51.5bn and $52.5bn, down from a previous forecast of between $53.8bn and $55bn. 

Cisco’s CFO, Scott Herren, said during the webcast: “We are realigning our investments and expenses to reflect the current environment to help maximise long-term value for our shareholders. As part of our announced restructuring plan, we expect to impact approximately 5% of our global workforce with estimated pre-tax charges of approximately $800m.”

That current environment is not as great as Cisco had expected. The vendor had previously expected a slight dip in sales for its fiscal second quarter, which ended 27 January 2024, but for revenues to then pick up in the following six months. And indeed, second-quarter revenues came in at $12.8bn, down 6% year on year. 

But the coming months are not expected to live up to previous expectations, and with the lower full fiscal year forecast, it means Cisco is on course to report a full fiscal year decline in revenues of up to 10%. And it will be a while before Cisco closes the massive $28bn acquisition of Splunk, a move that will bolster its AI-enabled security and observability (analytics) capabilities, and see the deal start adding to its top and bottom lines.

The vendor’s share price reacted to the lower forecast accordingly, taking a 4% dip in early trading on Thursday to $48.24.

During the webcast, CEO Chuck Robbins commented on the expected impact of the Splunk acquisition and the current challenges the company is facing in the market. “Overall, our Q2 results continue to advance our strategic business transformation around driving higher levels of software subscriptions and annualised recurring revenue, or ARR, both of which showed performance gains in the quarter. Our pending acquisition of Splunk also further supports our transformation strategy by fueling stronger growth, expanding our portfolio of software-based solutions, and generating higher levels of ARR with roughly $4bn in additional ARR expected upon closing, and will make us one of the largest software companies in the world,” noted Robbins.

He then turned his attention to “the demand environment”. “In terms of the macro environment, we are seeing a greater degree of caution and scrutiny of deals given the high level of uncertainty. As we’re hearing this from our customers, it’s leading us to be more cautious with our forecast and expectations. 

“Second, as we discussed last quarter and subsequently saw in other technology provider results, customers have been taking time since the start of our fiscal 2024 to deploy the elevated levels of products shipped to them in recent quarters and this is taking longer than our initial expectations. 

“Third, we also continue to see weak demand with our telco and cable service provider customers. This industry has seen significant pressure, and they are adjusting deployment phasing, which is weighing on our business outlook. Given these factors, we are adjusting our expenses and investments to reflect the current environment. That said, for the product categories in which we can measure customer inventory absorption through connections to the cloud, we are seeing steady progress. However, based on conversations with customers, we still believe we are one- to two-quarters away from full implementation of their inventory, which, as I mentioned, is longer than we expected,” explained Robbins.

So a more challenging end to the current fiscal year for Cisco and, with the company still experiencing weak demand from telecom and cable network operators, that doesn’t bode well for the rest of the network equipment developer community: 2024 looks like being a tough year for telecom vendors. 

- Ray Le Maistre, Editorial Director, TelecomTV