Cisco Systems (CSCO) stock fell hard in late trading Wednesday after the networking gear maker signaled slower growth ahead, a situation facing other large technology companies as well.
The San Jose, Calif.-based company also announced that it's cutting 4,000 employees, or 5% of its global workforce, in the current quarter.
Cisco expects to incur pretax charges of up to $550 million from the layoffs. About $250 million to $300 million will be applied in fiscal Q1, with the remainder charged during the rest of the year.
Cisco CEO John Chambers called the move a "workforce realignment and rebalancing" due to lackluster revenue growth. Meanwhile, it plans to invest in newer areas such as video, he says.
"The most difficult decisions we make as leaders are those that impact our employees," Chambers said on a conference call with analysts. "This is just good business management.
For its fiscal fourth quarter ended July 27, Cisco reported a profit that barely exceeded analyst estimates, while its revenue was in line with views.
It forecast sales in the current quarter to rise by 3% to 5% from the prior-year period, when analysts were at the top end of that range.
Cisco stock was down 9% in after-hours trading Wednesday. During the regular session, shares fell a fraction to 25.79.
Cisco is scrambling to boost revenue from areas including collaboration software, database and wireless as sales of its core networking hardware products continue to show little if any growth.
The company underscored the urgency of the transition when it agreed to buy Sourcefire (FIRE), a leading provider of security software, for $2.7 billion last month.
Security and other parts are emerging as important components for Cisco, says Catharine Trebnick, an analyst for Northland Capital Markets.
"They are looking at this part of the business to help accelerate growth," she said. "These guys are the 800-pound gorilla and their channel is extremely competent.
For the July quarter, Cisco reported a per-share profit, minus items, of 52 cents, up 11% from a year earlier and a penny better than analysts were expecting.
Revenue grew by 6% to $12.4 billion in line with the consensus of analysts polled by Thomson Reuters.
During the call, Chambers praised the company's growth in emerging areas such as data center and mobility but mentioned several times his concern over the uncertain economic backdrop and the lack of growth overall in emerging markets and newer areas, including security.
"Our results demonstrate the mixed nature of the market," he said. "Last quarter I described a continuing slow recovery and I haven't seen anything to suggest this dynamic will change in the short term. This recovery is more mixed and inconsistent than others I have seen.
In the July quarter, Cisco's switching and routing gear, which accounts for about 60% of its revenue, continued to be mostly stagnant.
Cisco's downbeat report followed disappointing results this earnings season from tech giants such as IBM (IBM), Microsoft (MSFT) and Oracle (ORCL).
Hardware sales have slowed as more companies adopt cloud-based computing, a system that allows companies to store and access data over the Internet with less reliance on in-house hardware systems.
The lack of growth makes recent software acquisitions such as Sourcefire all the more urgent, says Trip Chowdhry, an analyst for Global Equities Research.
"Their core business is under market pressure, the demand is weak so they are diversifying by acquiring software companies like Sourcefire," he said.
Sales of large-scale video conferencing systems are falling due to lower cost services that are available over the Internet, says Trebnick.