Cisco Systems Inc., the world’s largest networking-equipment company, may cut at least 5,000 jobs to revive profit growth as rivals erode market share, analysts at Gleacher & Co. and Miller Tabak & Co. said.
Cisco Chief Executive Officer John Chambers said he planned to cut more jobs and drop less-profitable businesses after closing the Flip video-camera unit and firing 550 workers in May. The company will give an update “on the cost reductions, including layoffs, on our next earnings call,” Karen Tillman, a spokeswoman, said in an e-mailed statement today.
Chambers is under pressure to cut costs because competitors such as Juniper Networks Inc. and Hewlett-Packard Co. are making lower-priced, simpler products. Sales of Cisco’s switches and routers, which made up more than half of revenue last year, will continue to slip, said Brian Marshall, an analyst at Gleacher.
“The revenue trajectory hasn’t been where it should be,” Marshall, who has a “neutral” rating on the stock with a target price of $17, said in an interview. “The company is not staffed on an appropriate level. They simply have too many employees.”
Cisco’s shares fell 39 cents, or 2.5 percent, to $15.35 at 2:49 p.m. New York time on the Nasdaq Stock Market. The stock had dropped 22 percent this year before today, while the Standard & Poor’s 500 Index rose 7 percent.
The company may shave as many as 10,000 positions over the next year, said Alex Henderson, an analyst at Miller Tabak & Co. in New York, in an interview. He rates the shares a “buy” with a target price of $21.
“They need to keep cutting until they can get their top line growing,” he said. “They may be cutting costs for a long time. It could be an extended tragedy.”
Hewlett-Packard gained 2.5 percentage points in the worldwide share of Ethernet switching revenue in the first quarter of 2011, the Palo Alto, California-based company said in a statement today on its website, citing research from Dell’Oro Group. Cisco lost 5.8 points in the same period, HP said.
In global router sales, Hewlett-Packard said it gained 2.5 percentage points in that quarter, while Cisco lost 3.1 points.
Cisco’s revenue is projected to rise 7 percent this year to $43 billion, less than the 11 percent growth posted in 2010, according to the average estimate of analysts in a Bloomberg survey. Analysts have an average stock target price of $20.62, Bloomberg data show.
Cisco may eliminate positions in the consumer-product unit, which makes Linksys home-networking equipment, Marshall said. Some investors have said the company should exit consumer products entirely to focus on traditional enterprise offerings such as routers and switches. Cisco’s equipment is used by corporate networks and telephone and Internet service providers to direct Web traffic.
Trimming about 5,000 jobs would reduce operating expenses by about $1 billion annually and boost 2012 earnings by about 8 percent, Marshall said.
The company is also reorganizing management to streamline its business and focus on areas of growth, Cisco said in May. To speed decision making, the company organized field operations into three geographic regions and reformed a council-style management structure.
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