Cisco profit falls amid restructuring

Cisco Systems’ profit in its fiscal fourth quarter fell about one-third from a year earlier, while its sales increased only 3.3 per cent, the company reported on Wednesday.

Net income in the fourth quarter ended July 30 was US$1.2 billion, down 36.3 per cent from US$1.9 billion a year earlier. Earnings per share declined by 33.3 per cent, to 22 cents per share from 33 cents for last year’s fourth quarter.

The results came amid a major restructuring at Cisco, aimed at refocusing the company on core businesses such as routing and switching.

“We’ve made significant progress on our comprehensive action plan to position ourselves for our next stage of growth and profitability, while delivering solid financial results in Q4,” Chairman and CEO John Chambers said in a press release reporting the financial results.

Cisco’s sales rose to US$11.2 billion from US$10.8 billion in the quarter. That figure beat the consensus estimate from analysts polled by Thomson Reuters. They had expected $10.98 billion.

Profit excluding certain one-time items was $0.40 per share, which slightly exceeded the analyst forecast.

Chambers vowed to accelerate Cisco’s restructuring, which so far has resulted in 6,500 announced job cuts, the elimination of the company’s Flip video division and other adjustments. The process will continue at an even faster pace and will take years, not quarters, he said.

“It would be very easy to rest upon the changes we have made. That is clearly not what we will do,” Chambers said on a conference call to discuss the financial results. He said Cisco is becoming an “aggressive, focused and simplified” company. Cisco is ahead of schedule on its plan to cut $1 billion from its annual costs starting in fiscal 2012, Chambers said.

In answer to analysts’ questions, Chambers said Cisco remains committed to its TV set-top-box business, though it will move out of the “connected home” business, leaving home networking to its Linksys unit. The WebEx online conferencing service will be sold as part of a larger collaboration architecture that also includes its Quad enterprise social-networking platform and MediaNet infrastructure. “We left it apart for too long,” Chambers said.

Cisco has already taken several steps in the restructuring, according to Gary Moore, the company’s recently appointed chief operating officer. It has sharply reduced the number of boards and councils in key areas, appointing accountable leaders instead, and has given regional sales teams more autonomy, he said. The company has realigned about 23,000 people in a company with a work force of just over 70,000. The overall goal is to be able to adjust to customer demands more quickly, Moore said.

In the long run, the changes Cisco is making now will help it become more competitive against rivals that are not going through the same process, Chambers.

“While I wish we hadn’t had to go through this, it clearly was time for fundamental change at Cisco,” he said.

The company expects year-over-year revenue growth to remain about the same as in the previous period, with growth between one per cent and four per cent.

Public-sector spending, a weak spot in the fourth quarter, will remain slow worldwide for the next several quarters as governments make cuts, Chambers believes. In the U.S., orders from the federal government were down 18 per cent year over year, while state and local orders fell two per cent. Two areas where public-sector agencies continue to invest are cloud infrastructure and video, he said.

Despite the grim financial news of recent weeks, Chambers sounded an optimistic note. Both revenue and orders in the top developing markets, such as Brazil, Russia, India, China and Mexico, grew an average of 25 per cent in the quarter, he said. Cisco had its biggest quarter ever in sales to service providers, with global service-provider orders growing 19 per cent and carrier infrastructure products such as the CRS core routing platform and the ASR9000 and 1000 switches showing strong growth.

Meanwhile, Chambers said he thinks the worst is over for Cisco’s declining market share in switches and that the company’s share of the routing industry will grow.

In after-hours trading late Wednesday, Cisco’s shares (Nasdaq: CSCO) were up US$0.95 at US$14.68.

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