Cisco Systems, the global tech giant based in San Jose, California, has recently announced a significant restructuring plan that includes cutting 5% of its workforce, approximately 4,250 employees, as part of a strategic pivot towards artificial intelligence (AI) and software development. This move comes amidst a challenging macroeconomic environment, leading to a downward revision of its annual revenue forecast.
Cisco Systems Layoffs & The AI Pivot
During an earnings call, Cisco Systems layoffs were announced along with adjusted revenue expectations from $55 billion to a range of $51.5 to $52.5 billion for the fiscal year. The layoffs, resulting in pre-tax charges of about $800 million related to severance and benefits, are aimed at reallocating resources towards high-growth areas such as AI, amidst sluggish demand from telecommunications and cable service providers.
Cisco's CEO, Chuck Robbins, emphasized the importance of innovation at the core of Cisco's strategy, stating, "Our innovation sits at the center of an increasingly connected ecosystem and will play a critical role as our customers adopt AI and secure their organizations." Robbins highlighted the weak demand from telco and cable service provider customers as a contributing factor to the revised forecasts.
Partnership with a Powerhouse
In an effort to bolster its AI capabilities, Cisco announced the expansion of its partnership with Nvidia, a leading AI chip manufacturer. This collaboration aims to provide enterprises with simplified cloud-based and on-prem AI infrastructure, combining Cisco's networking hardware and software with Nvidia's technology. This partnership is expected to enhance AI workloads' support and integrate Nvidia's ethernet technology into data centers and AI applications, marking a significant step in Cisco's push into the AI space.
Despite the job cuts and lowered revenue forecast, Cisco reported an adjusted profit of 87 cents per share and revenue of $12.79 billion in the second quarter of its 2024 fiscal year, surpassing estimates. Robbins remains optimistic about capitalizing on the multibillion-dollar AI infrastructure opportunity, indicating Cisco's strategic focus on future growth areas.
Market Reaction
The announcement led to a more than 3% drop in Cisco's stock, reflecting investor concerns over the reduced revenue forecast and the broader impact of the challenging economic landscape. Analysts have pointed to the networking downcycle, excluding AI investments, as a critical challenge for Cisco, with Piper Sandler's James Fish noting, "Things have gone from bad to worse, with Cisco drastically cutting FY24 expectations a 4th time as management overestimated that demand would return in F2H24."
Despite these challenges, Cisco is looking to counter tepid demand for its traditional networking gear by shifting focus to AI and cybersecurity. This strategy includes a significant $28 billion acquisition of cybersecurity firm Splunk, expected to close earlier than previously estimated. With nearly $3 billion in product pipeline associated with AI projects, Cisco is positioning itself to leverage AI technology for future growth, despite current setbacks.
Cisco (CSCO) is currently down approximately 16.75% from its 52-week high of $58.19, with a recent closing price of $48.44
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