Cisco--One Of The Largest US Layoffs Of The Year?

Cisco (NASDAQ: CSCO), one of the largest tech firms in the U.S. with a market cap of $85 billion and annual sales of $40 billion, will lay off 5,000 to 6,000 people this year, according to Gleacher & Co. analyst Brian Marshall. The move would save the company $1 billion per annum. The huge router firm’s shares sold off over 2% to $15.40, near a 52-week low.

The action, if it occurs, could be solely due to management mistakes of CEO John Chambers. He is, at 62, the dean of Silicon Valley chief executives. But Wall St. has become concerned that his frenzy of M&A activity over the last decade has left the company too complex and overloaded with unrelated operating units. Cisco’s core business is the manufacture and sale of expensive router systems used to control Internet traffic, particularly video and data. Chambers added home set-top boxes, Wifi units, and video conferencing operations to the company’s product line. Management’s ability to properly maintain all these diverse units has become impossible, critics say.

The layoffs may be due to problems well beyond Cisco, which would say a great deal about the overall U.S. economy. Its earnings have not recovered from the recession. Cisco made $1.8 billion in its last quarter on revenue of $10.9 billion. Margins were uncharacteristically low. The concern is that even Cisco’s router business has lost momentum. Part of that could be due to competition from firms like Juniper (NASDAQ: JNPR). But it may be due in part to faltering orders from Cisco’s largest customers: telecom and cable companies. These industries may be under earnings pressures of their own because demand for both their consumer products and enterprise systems has slowed along with the global GDP.

The 5,000 jobs Cisco may shed will help margins. But the solution will only be temporary if demand for Internet infrastructure products has been fractured by clients who have stopped spending as they wait to see whether the brief recovery will continue.

Douglas A. McIntyre