Cisco Systems Inc. is cutting 5,500 employees—7% of its workforce—in the networking company’s latest reaction to market shifts, including customers favoring software over hardware.
The reduction beginning this quarter renews a pattern of midsummer moves to shed costs and make room to hire employees with new talents.
The job cuts, disclosed with its fiscal fourth-quarter financial results, mark the most dramatic move yet by Chief Executive Chuck Robbins, who a year ago assumed a positionheld for two decades by John Chambers, who remains the company’s chairman.
The San Jose, Calif.-based company said it would reinvest the savings from the job cuts into businesses that it expects to grow, including its own software and service offerings. Cisco said it plans to record pretax charges of up to $700 million for severance and termination benefits.
Cisco has long held a dominant share of sales of the routing and switching equipment used to funnel data over the internet and between computers in data centers. Though the company has diversified its business significantly, those two hardware categories remain its largest sources of revenue, and their sales have been slowing lately.
On Wednesday, Cisco said fourth-quarter switching revenue rose 2%, while revenue in its routing business fell 6%. In the prior quarter, revenue fell in both businesses.
Over all, Cisco said its fiscal fourth-quarter profit rose 21% on a 1.6% revenue drop as the company tightened expenses in a variety of areas. Shares of the company fell 1% to $30.31 in after-hours trading.
Profit climbed to $2.81 billion, or 56 cents a share, from $2.32 billion, or 45 cents a share in the same period a year earlier. Revenue fell to $12.64 billion from $12.84 billion.
The company projected revenue in the current quarter would be flat plus or minus 1%, compared with the year-ago period. It predicted adjusted earnings per share of between 58 cents and 60 cents. Analysts expect revenue to fall 2% and adjusted earnings of 60 cents.
“We continued to manage our business well,” Mr. Robbins said on a conference call, despite what he called an uncertain economic environment.
Revenue from telecom carriers and other service providers declined 5%, turning negative after three consecutive quarters of growth, he said.
Cisco and other hardware vendors have been hurt by changes at such customers, which have been struggling to pare costs while handling steadily increasing data traffic. In many cases, they are adopting a combination of networking software and less-expensive boxes running standard Intel Corp.microprocessor chips instead of special-purpose hardware that is Cisco’s specialty.
One poster child for the trend is AT&T Inc., which has been promoting software-based approaches that it says can allow the carrier to deploy services and respond to market changes faster than using standard hardware. John Donovan, its chief strategy officer and group president, appeared on stage in San Francisco Wednesday with Diane Bryant, an Intel executive vice president, to discuss plans to broaden the companies’ technical collaboration.
The software-based approach in the future “won’t be an afterthought,” Mr. Donovan said. “It will be the fabric.”
Cisco has acknowledged the trend and now allows customers to more easily program its hardware, an approach the company said has taken hold. But that software only works on Cisco equipment; many backers of what the industry calls software-defined networking favor programs that can work on equipment from multiple vendors.
The company also has been working on more offerings delivered as services, including forms of conferencing and collaboration and security offerings.
Analysts note that hardware companies that make such changes can ultimately become more profitable and develop recurring sources of revenue. But turmoil tends to result in the short term, as equipment sales slow and companies require different talents from employees. “It is a tectonic shift for a company of that type,” said Glenn O’Donnell, an analyst at Forrester Research. “But it’s also necessary.”
Cisco has frequently used the start of new fiscal years in August to announce job reductions. In August 2014, for example, Mr. Chambers announced plans to shed about 6,000 employees, or 8% of its workforce at the time. The prior year, the cuts totaled 4,000 jobs, or 5% of its workforce.
Cisco’s cuts follow similar moves by other mature tech companies. Intel, for example, announced plans to trim 12,000 jobs in April, and International Business Machines Corp.in May laid off an undisclosed number of employees.