“Streamlining” in Struggling Companies: Cisco (CSCO) Drops 6,000 Jobs Amid Massive Stock Buybacks

Remy Merritt |

stock buybacks, tech stocks, tech blue chips, Cisco stock, layoffs, corporate greedIn Wednesday’s earnings call, Cisco Systems Inc. (CSCO) CEO John Chambers reported good news and bad news for the large-cap tech company. The bad included flat fourth-quarter profits, and fiscal year revenue decreased 3% from 2013 to $47.1 billion.

Despite the year-over-year loss, FY2014 represented the second strongest year in Cisco’s history. Future forecasts are mixed; 2014 shareholder returns in the form of dividends were a record $13.3 billion, but Cisco projected an at-most 1% increase in profit and revenue over the next three months. The company's stock fell 2.6% on the day, making its year-to-date performance a 10% gain.

But perhaps the worst news of all was the announcement that Cisco will cut 6,000 jobs, or 8% of its workforce. And this isn’t the first job cut for the world’s largest networking equipment manufacturer. Cisco has already reduced its workforce by 17,000 over the past four years, though acquisitions have recovered about 3,000 of those jobs. Headcount is placed at around 74,000 today, up a modest 4% from 71,000 in 2011.

As a result, Cisco is facing restructuring charges of $700 million in cash due by July 2015. Cisco expects to cover between $250-300 million of the charges in the first quarter of 2015, likely attributing to the company’s flat profit forecasts for the next three months.

Layoffs Accompanied by Stock Buybacks: Quick Investor Value at Workers’ Expense

The most recent cut will number lost jobs at 21,000 since 2011. Over the same period of time, Cisco has repurchased $21.9 billion in stock. Assuming a generous annual salary of $100,000, reducing labor payments has saved Cisco $2.1 billion, or 10% of what the company has spent on stock buybacks to maintain shareholder value. To help finance its buyback binge, Cisco issued $8 billion in bonds at the end of February.

Cisco is not the only tech software company making deep cuts to its workforce while repurchasing huge amounts of stock. Rivals IBM Corp. (IBM) , Hewlett-Packard Company (HP) , Juniper Networks, Inc. (JNPR) , and Microsoft Corp. (MSFT) , have each recently undergone internal restructuring amid sluggish sales in emerging tech markets.

On Feb. 26, IBM began dismissing US workers after having already begun to remove international labor in Europe, Asia, and South America. Estimates for the final layoff total vary wildly from several thousand to 13,000. That same first quarter, IBM went on an $8.2 billion stock buyback binge with plans to spend an additional maximum of $5.2 billion in the remaining nine months of the fiscal year. That buyback was an astounding 41% higher than Barclays’ estimate of $5.8 billion. IBM’s sales had been falling for eight straight quarters prior to restructuring.

Also in February, Sunnyvale-based Juniper Networks succumbed to pressure from activist hedge funds Elliott Management Corp. and Jana Partners LLC to return at least $3 billion to shareholders and cut $160 million in expenses, Bloomberg reported. Two months later, the company announced a 6% cut in its global workforce.

The tiny company only numbered 9,500 at the time, which would be whittled down to just under 9,000. It had already laid off 3% of its workforce in October 2013 despite delivering an earnings per share report that was 6% higher than analysts’ expected. The job cut was attributed to an earnings forecast for the next quarter that was barely deficient — analysts expected $1.23 million in revenue, while Juniper projected between $1.2 billion and $1.23 billion. As a result, 250 jobs were lost between 2013 and early 2014.

Hewlett-Packard has been laying off workers since May 23, 2012 when CEO Meg Whitman first announced plans to eliminate 7% of its workforce, “in the ballpark” of 25,000 jobs which later inflated to reach 34,000. The layoff demon reared its head again exactly two years later, and on May 23 of this year HP announced another 11,000 to 16,000 job cuts.

It claimed the restructuring would generate $1 billion in annual savings in addition to the projected $3.4-4 billion from the previous layoffs. Meanwhile, HP in its second quarter decreased capital expenditures by almost 19% from the previous quarter while increasing (and potentially redirecting) expenditures on stock buybacks by 32%.

Microsoft announced on July 17 it would cut 14% of its workforce by the end of the year, the largest round of layoffs in the company’s history.  No stock buybacks have been announced yet.

Layoffs save companies cash, often more than they had anticipated. With shareholders in mind, that cash is typically reinvested in stock buybacks to maintain investor value. Unfortunately, this is only a quick fix to keep investors interested – stock buybacks do little for long-term company profit and health, especially when they are facilitated by mass layoffs.

There is a small upside to layoffs, if it could be called such: job cuts are generally part of a long-term restructuring plan that involves a streamlined and efficient workforce, and modest rehiring accompanied each instance of layoffs within those four companies. Cisco laid off 1,300 workers in 2012, but its global workforce expanded by 8,410 people that same year.

Cisco Cites Overcoming Difficult Global Markets and Improved Investment as 2015 Goals

Chambers blamed the cuts on global uncertainty, but its pipeline for global pilot projects appears healthy. Executives met with leaders of the city of Hamburg to sign a Memorandum of Understanding between Cisco and the German city for projects involving smart traffic, smart street lighting, infrastructure sensing and remote citizen services. Cisco has also maintained its presence in Copenhagen and Barcelona to develop each into “smart cities” with Cisco’s technology.

While some are looking to Chambers, who has led the software giant for nearly 20 years and in 2012 said he was considering retiring within two to four years, others are suggesting a revamp in middle and upper management. Chambers said he would use the savings from the job cuts to invest in cloud computing and security, which he believes are profitable sectors. Certain of Chambers’ past software investments have fallen through, leading to analyst scrutiny over his ability to pull Cisco out of a sales slump and battle increasing competition.

Chambers appears to be making good on his promise. Acquisitions for the year include ThreatGRID, a provider of dynamic malware analysis and threat intelligence technology, and Tail-f Systems, a multivendor network service expected to accelerate Cisco’s cloud virtualization technology. Cisco’s corporate venture capital subsidiary, Cisco Investments, will allocate an additional $150 million to fund startup companies focused on disruptive tech markets such as big data, storage and India innovation.

Meanwhile, 6,000 individuals currently working in the industry will be forced to compete for employment with companies that are in the midst of their own cuts. 

 

DISCLOSURE: The views and opinions expressed in this article are those of the authors, and do not represent the views of equities.com. Readers should not consider statements made by the author as formal recommendations and should consult their financial advisor before making any investment decisions. To read our full disclosure, please go to: http://www.equities.com/disclaimer

Companies

Symbol Name Price Change % Volume
IBM International Business Machines Corp 159.84 -0.18 -0.11 3,447,052
HP Helmerich & Payne Inc. 81.31 1.86 2.34 2,336,270
CSCO Cisco Systems Inc. 29.53 0.28 0.96 20,865,842
JNPR Juniper Networks Inc. 26.93 0.10 0.37 5,105,740
MSFT Microsoft Corporation 60.22 0.97 1.64 23,552,658
RY.PR.A:CX2 Royal Bank of Canada Non-Cumulative First Preferre n/a n/a n/a n/a

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