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Cisco layoffs a response to industry shift to software, cloud services

The latest Cisco layoffs are a result of customers moving to networking software and the cloud instead of the company's proprietary hardware.

Cisco's decision to cut 5,500 jobs or 7% of its workforce is the latest move to cope with an industry shifting away from the company's core business of selling specialty networking hardware.

On Wednesday, Cisco announced the reductions in its workforce of 73,700 while releasing financial results for the fiscal fourth quarter ending July 30. Cost savings from the Cisco layoffs were earmarked for product lines reflective of where the networking industry is heading, including cloud-based services and software for managing networks.

"Primarily, we are looking at the areas of growth that we believe will grow faster than others," Cisco CEO Chuck Robbins told analysts during a teleconference.

Indeed, revenue from Cisco's legacy switching and routing portfolios was flat and down, respectively, for the fiscal year. Switching sales for the year stayed at $14.8 billion, while routing fell 4% to $7.4 billion. Switching and routing accounted for 45% of Cisco's overall revenue for the fiscal year.

Like other older generation tech companies, Cisco has had to restructure its business as customers followed trends that steered them away from the company's traditional product lines. Other larger vendors that have had to undergo major changes to adapt to market-disrupting technology shifts include PC makers Dell and Hewlett-Packard, which split last year into two companies, and chipmaker Intel.

In Cisco's case, customers are switching from specialty hardware to less expensive software and cloud services.

"I won't call it an exodus, but certainly a pretty significant shift of buyers are going to cloud-based services, as opposed to on-premises hardware," said Glenn O'Donnell, an analyst at Forrester Research based in San Francisco. "And that on-premises hardware itself is now becoming very software centric."

Cisco layoffs follow growth in software, cloud technologies

Cisco reported much higher growth in products reflective of those industry trends. Network security, which Cisco delivers as software and as a cloud-based service, rose 16% in the quarter and 13% for the year to $540 million and $2 billion, respectively.

Revenue from the company's software-defined networking platform, called the application-centric infrastructure (ACI), grew 36% in the fourth quarter at a $2.3 billion annualized run rate, Robbins said.

Revenue from Cisco's collaboration product portfolio, which includes its online meeting software, WebEx, and its cloud-based messaging and content-sharing service, Spark, grew by 6% in the quarter and 9% for the year to $1.2 billion and $4.4 billion, respectively.

Overall for the quarter, net income increased 21% to $2.8 billion, despite a revenue drop of 2% to $12.6 billion. For the current quarter, Cisco predicted revenue would fall between a decline of 1% and an increase of 1%.

Robbins attributed the revenue decline in the quarter to a drop in sales to service providers and lower revenue from emerging markets. Sales in the latter fell 6% overall and 12% in China alone, the company reported. Service provider revenue dropped 5%. These customer categories turned negative after three consecutive quarters of growth.

The company expected to take $700 million in charges throughout the fiscal year as a result of the layoffs. The last major round of Cisco layoffs was two years ago when it cut 6,000 jobs or 8% of its workforce.

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