Cisco third quarter better than expected, outlook weak and layoffs loom

Cisco delivered better-than-expected third quarter earnings and CEO John Chambers said the company has "a clear game plan" to "transition to the next phase."

Cisco delivered better-than-expected third quarter earnings and CEO John Chambers said the company has "a clear game plan" to "transition to the next phase." However, Cisco's outlook fell short of expectations and Chambers noted that the company sees a weak fourth quarter ahead with layoffs.

The company said that fourth quarter revenue will be flat to up 2 percent from a year ago. Non-GAAP earnings are expected to be 37 cents a share to 39 cents a share. Wall Street was expecting earnings of 41 cents a share on revenue of $11.58 billion for Cisco's fourth quarter.

On a conference call with analysts, Chambers said:

Q4 will continue to show weakness, while we do the hard work behind the scenes to be able to execute these changes, and we will provide for Q4 guidance that reflects that lag. We know what we have to do. We have a clear game plan.

As noted previously, it was a busy quarter for Cisco, which exited its Flip camera business and reorganized to improve focus. Cisco reported fiscal third quarter earnings of $1.8 billion, or 33 cents a share, on revenue of $10.9 billion. Non-GAAP earnings were 42 cents a share. Wall Street was expecting earnings of 37 cents a share on revenue of $10.85 billion.

But Cisco said it sees continued weakness in its public sector business and its core switching business faces competition from Juniper and HP. Gary Moore, Cisco's chief operating officer, said the company is reevaluating its units and plans layoffs ahead. He said:

To be clear, we do anticipate a workforce reduction. On a global basis assessing both our full-time and contract workforce, we are taking the time needed to do what is right for our business and for our people. Outcomes from these two parallel moves, alongside a review of initial steps taken, like the early retirement program that we recently announced, will provide us with a solid view of the next actions we need in order to plan for a headcount reduction that we can execute with precision. The decision to include headcount reduction of our full-time and contractor workforce as a way of reducing expense is difficult. It is not something we take lightly, and we will communicate exactly what these decisions mean to our employees by the end of summer.

In the big picture, Cisco just isn't capable of growing at its former clip. Chambers said the company will detail future growth expectations in the months to come.

We recognize that the growth rate that we sometimes talked about in the past of 12% to 17% long-term growth outlook is not reflective of the environment. Our portfolio positions us for growth next year, and we will communicate both our targeted operating model and our long-term growth expectations as part of our September financial analyst conference with our shareholders. We do not underestimate the transition in front of us or the importance to rapidly simplify our organization to deal with the competitive challenges facing us in switching and the shift in public sector spending.

By the numbers for the third quarter:

  • Product revenue was $8.67 billion and service revenue was $2.19 billion.
  • The company ended the quarter with cash and equivalents of $43.4 billion.
  • Research and development spending was $1.43 billion, up slightly from a year ago.
  • Days sales outstanding were 37 days, down from 40 in the second quarter.
  • Inventory turns were 11.1, up from 10.6 in the second quarter, but down from 11.5 a year ago.
  • Cisco generated $3 billion in cash flow in the third quarter.