Forecasting a significant drop in revenue for the fourth quarter, a J.P. Morgan analyst Tuesday reported that Cisco Systems Inc. "could" announce a 10% workforce reduction soon, equal to about 6,600 employees.
The analyst, Ehud Gelblum, said a 10% reduction would save the networking company about US$900 million a year, according to his 49-page, first-quarter 2009 preview of communications equipment and networking companies.
"We expect Cisco to guide fourth fiscal quarter revenue down 17-22%, year over year, as demand continues to deteriorate, in-line with our estimate for a 21% year over year decline," Gelblum said.
Cisco's fourth fiscal quarter ends July 31. "We believe Cisco could also announce a 10% headcount reduction, which we calculate could save $900M annually," Gelblum wrote.
The dismal sales outlook for Cisco, and the possibility of layoffs, comes as two Cisco competitors, Juniper Networks and F5 Networks, recently lowered sales projections, citing a drop in networking purchases by their customers.
Gelblum said both Juniper and F5 increased their earnings-per-share expectations despite expected revenue declines as a result of making aggressive cost cuts.
Gelblum said his favorite stocks for the longer term in the sector are Motorola Inc., Qualcomm Inc., Ciena Corp. and F5 because of a combination of factors, including product growth and aggressive cost cutting.
Cisco is expected to offer guidance for the fourth fiscal quarter when it gives third-quarter results in a conference call May 6. The company has about 66,000 employees.
A Cisco spokesman declined comment on the J.P. Morgan report directly but noted that Cisco officials in February discussed a "limited restructuring" that could lead to 1,500 to 2,000 job reductions companywide in the "near term."
The spokesman said the 1,500 to 2,000 jobs "do not represent a broad-scale layoff in our workforce. ... This limited restructuring is part of our ongoing, targeted realignment of resources.
While Cisco constantly manages its business priorities, resources and overall employee alignment as part of our overall business management process, we are sensitive to the impact these decisions have on employees during this challenging economic environment. We are doing everything possible to minimize the impact on employees affected by the limited restructuring."