Everybody expects some drastic changes of Cisco Systems (Nasdaq: CSCO ) . How far is the company willing to go?
After CEO John Chambers issued a public "mea culpa" back in April -- and a singable one at that -- its shares have fallen by a market-lagging 8.4%. Chambers promised bold changes and presented a pared-down strategy that would fit just as well with today's IBM (NYSE: IBM ) or Hewlett-Packard (NYSE: HPQ ) . Cisco wants to own the data center inside and out and doesn't mind dropping some consumer businesses to get there.
This week, Gleacher analyst Brian Marshall predicted as many as 5,000 headcount reductions that would reduce annual costs by about $1 billion and pad next year's earnings by 8%. To complete the strategy change, Cisco would then need to merge with storage giant EMC (NYSE: EMC ) to gain much-needed storage and virtualization exposure -- and finally lower its long-term targets for both growth and margin.
Investors saw that research note and shrugged as Cisco shares fell alongside the general market on a gloomy Monday.
But Cisco's stock put some spring in its step on Tuesday, when Bloomberg reported an even larger slimming effort. Through a combination of straight-up layoffs and early retirement, Bloomberg's anonymous sources expect about 10,000 Cisco staffers to be lining up at their local soup kitchens. Shares jumped more than 2% on the news.
Let's assume that Bloomberg's sources are correct. Will a leaner, meaner Cisco be a renewed menace to competitors HP, Juniper Networks (NYSE: JNPR ) , and Alcatel-Lucent (NYSE: ALU ) , which have been lining up to steal Cisco's business lately?
I'm not so sure. This networking giant may have seen its peak already -- not in terms of revenue but most likely from a market-share perspective. The boneheaded decision to start selling Cisco-branded servers transformed the company from a default choice of IT managers and resellers everywhere into just another wannabe-IBM vertical integrator, easily replaced. That's where today's troubles started, and now Cisco has no choice but to stay the course.
In a few years, Cisco might be a lean, mean cash machine with a killer dividend and modest growth. There's a bumpy road leading up to that day -- and that's assuming that these changes all work out for the best. If you want to see a much better opportunity in the networking sector, I'd suggest reading a free report on that topic. With or without Cisco up front, the hunt for ever more bandwidth continues.