March 28, 2013, 4:42 PM — Cisco this week reduced its workforce by about 500 people as the company realigns to face the advent of software-defined networking, software-defined networking, cloud computing and its impact on routing and switching.
"We routinely review our business to determine where we need to align investments based on growth opportunities," a Cisco spokesperson stated in an e-mail to Network World today. "Yesterday, Cisco performed a limited restructuring that will impact less than 1% of our population globally. These actions are subject to local legal requirements, including consultation, where required."
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But Cisco is rearranging operations while the industry gauges the potential impact of SDNs and cloud computing on IT operations and buying patterns among customers, and the business models of network hardware vendors.
FBR Capital recently downgraded Cisco and Juniper stock to "Underperform" based on these trends, and Goldman Sachs downgraded Juniper to "Sell." FBR expects a more than 40% reduction in the number of switching and routing ports in service provider networks over the next 18 to 36 months.
"We believe Cisco will become increasingly more challenged to offset weaker-than-expected routing and switching demand as it works to transition to a more software- and service-centric business model," states FBR analyst Scott Thompson is his report on the Cisco downgrade. "Looking ahead, we see the potential for additional negative technological trends that could significantly blur the lines between routers, switches AND servers. As a result, we expect: (1) a slow, but meaningful, reduction in the number of routers and switches deployed into networks; (2) the adoption of an increasingly larger mix of white box, lower-margin product; (3) the announcement of new competitive products and vendors that could negatively affect gross margins at both companies and across the space."
Cisco late last year disclosed a plan to double software revenue and significantly increase service revenue.
FBR expects network infrastructure transitions to common compute-based platforms - x86 servers running software-based, virtualized versions network hardware appliances are included in these -- and the consolidation of network functions to compute platforms based in metro or regional network data centers - the cloud computing model - to negatively impact switch and router sales to both enterprises and services providers.
FBR also sees SDNs and its open sources foundation, and network virtualization application taking a bite out of demand for dedicated, "purpose-built" routers and switches.
"Enabled by new silicon-based innovation, network virtualization, and advances in open source software, new computing/switching platforms may significantly reduce the need for purpose-built hardware, potentially diminishing demand and margin for many of the network components that Cisco offers to service providers and large enterprises," Thompson states in his report. "We expect this trend to drive networking vendors into software more quickly than many believe in an attempt to preserve revenue growth, creating a situation whereby the decline in hardware revenue may more than offset gains in software revenue."
Cisco's workforce stands at about 73,482 people.
Jim Duffy has been covering technology for over 25 years, 21 at Network World. He also writes The Cisco Connection blog and can be reached on Twitter @Jim_Duffy.
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