Cisco: Are Job Cuts Primer For Success Or More Sign Of Ruin?

| About: Cisco Systems, (CSCO)
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Last Friday Cisco Systems (CSCO) was one of the top ten most actively traded stocks on the NASDAQ, falling almost 2 percent to $16.36. It seems that, as always, earnings season is going to be an interesting time for Cisco. Last quarter, CEO John Chambers gave some of his usual sobering guidance when the economy looked weak. What comes next?

More Job Cuts

On Monday the 23rd, there was a rumor of more job cuts (between 1,300 and 1,650 total) to add to last year's layoff announcements. The last round hit about 9% of the work force, and this was expected to be closer to 2%. Brad Reese postulated that these would be across solely the WAAS engineers and sales team members, citing an anonymous source. The anonymous posts on his blog ( seemed to disagree, saying the cuts were more broad in their swath. After the rumor was announced, Cisco sent out a statement:

We routinely review our business to determine where we need to align investment based on growth opportunities. Additionally, we continue to evaluate our organizational structure as part of our plan to drive simplicity, speed of decisions and agility across Cisco.

Well, that doesn't sound too damning, does it? Everyone that's anyone routinely reviews their business and strategic initiatives, etc., etc.

As we focus on both of these efforts, we are performing a focused set of limited restructurings that will collectively impact approximately 2% of our global employee population. These actions, subject to local legal requirements, including consultation where required, are part of a continuous process of simplifying the company, as well as assessing the economic environment in certain parts of the world.

Source: Business Insider

Ay, there's the rub. If you interpreted "limited restructurings" as "we're firing people again," then I'd be willing to bet you're right. These are expected to "impact approximately 2% of [Cisco's] global employee population," and what can be more impactful that losing your job? Few things.

From a personal perspective, no one likes to see people getting laid off, especially in this economy. So this news is undeniably unfortunate. More ill-fated perhaps for Cisco is the timing; CSCO has traditionally gotten hammered at earnings calls over the last couple years. These have usually been the symptom of either an average call or weak guidance for future quarters. Now, with the economy slowing down in Europe and Asia, and the government steamrolling towards their fiscal cliff, why would Cisco choose to announce layoffs mere weeks before their earnings call?

I have two theories: 1.) they're going to post a great quarter, and claim that their initial job cuts are working and have supported the decision for more or 2) they're going to take a "big bath" as some would term it, where they make a negative announcement (mass layoffs are usually not considered the practice of a healthy company with a productive workforce, even if some would argue they're warranted) and follow it up with a below average earnings call to get all the bad news out in one fell swoop.

Will Cisco Beat?

This is hard to say. Given the softness in government spending and the decrease in Cisco's corporate sales, it seems like a stretch to say they'll beat. They could have a good quarter, but I believe they will give softer guidance than analysts expect (isn't it always such with Cisco?) and that might put some downward pressure on the stock. However, if Cisco does pull out a strong quarter somehow, with their current valuation so low (8-9 PE with a strong fundamental valuation to back up the relative one), then I'd expect some appreciation in price. In that case, these layoffs would be viewed in a more positive light, and seen as keeping the "leaning" process in full swing. Cisco has been "attractively valued" for some time now, though, so I understand that this is not exactly a reason to trade.

Big Bath Theory

The Big Bath Theory is more disconcerting for holders of CSCO stock. I'm worried that they could report a soft quarter, and give soft guidance, and drop even further. They hit $13.73 almost a year ago just before this very earnings call, so it is certainly within the realm of possibility. If this is the case, contrarians would have another opportunity to pick up CSCO at a ridiculous price, with a PE in the range that few stocks see. However, if they miss this quarter, layoff more workers and investors start getting more riled up about the fact that the stock has been relatively stagnant for the last 10 years (17.64% growth compared to NASDAQ composite growth of almost 120% over the last ten years and S&P composite growth of nearly 60%), I think Chambers will be feeling more than his usual heat from stockholders.


There is some uncertainty going into this earnings call for CSCO, and these layoffs have proven to supply more than the usual intrigue. I believe that those who are risk averse should consider some downward protection, given the possibility of the stock spiraling. As I write this, however, Cisco has dipped below $16 on high volume in after-hours trading, so there is an opportunity for the confident investor to take advantage of the 4-5% drop in share value since Thursday and make a value play. I'm less and less confident, however, that there is a catalyst on the horizon that will be able to elevate CSCO without further depression in stock price, and potentially a revolution of leadership.

Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.