Tickers in this Article: CSCO, FFIV, JNPR, HPQ, RVBD, EMC, IBM
There were plenty of rumors that Cisco (Nasdaq:CSCO) was going to launch a major restructuring effort, and the company delivered exactly that on Monday. While the plan may very well reduce costs and boost margins, investors should not get too excited about the announcement - companies do not cost-cut their way to prosperity, and sending thousands of employees packing does not address the company's significant competitive deficiencies.

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Poor Performance Comes Home to Roost
Cisco has been stuck in a funk for a while now as tech investors have abandoned this one-time golden child. Acquisitions of companies like Scientific Atlanta have failed to produce much value and the company has seen its competitive edge lost to dynamic rivals like F5 (Nasdaq:FFIV), Juniper (Nasdaq:JNPR), Hewlett-Packard (NYSE:HPQ) and Riverbed (Nasdaq:RVBD).

Where Cisco once pioneered markets, the company is now the entrenched old warhorse that others target for market share gains. As sales momentum has gone away, margin leverage has eroded as well. That has left Cisco in an all-too-familiar situation; the company produces good cash flow and is undervalued by that metric, but tech investors rarely ever reward cash flow in the absence of revenue growth momentum.

Firing Workers to Boost Profits
Unable to compete in the market and boost profits through operating leverage, Cisco management is looking to boost profits by firing workers. In a plan designed to save $1 billion, Cisco will be offering early retirement or firing roughly 6,500 workers (9% of the workforce). The company is also selling the set-top-box plant in Mexico that it acquired with Scientific Atlantic, and Foxconn will also be taking on the 5,000 workers at that facility.

Of course, saving money this way also costs money and the company says it may cost upwards of $1.3 billion to complete this process. Nevertheless, $1 billion a year is more than 5% of its operating expense base and that could boost net income and free cash flow by more than 10% a year.

Help Vs. Harm
These kinds of cost cuts come with their own set of risks, though. For starters, there are likely good people being let go in this process and rivals like Juniper and Huawei will almost certainly cherry-pick those who can help them in their ongoing efforts to bludgeon Cisco further. Along similar lines, layoffs are a definitive sign of weakness and it stands to reason that valued employees at Cisco, even those spared in these layoffs, may decide that it's time to look for greener pastures. After all, if Cisco management really expected a near-term resumption of growth and competitiveness, they wouldn't be cutting so many people.

Time to Find Some New Drivers
Cisco's issues stand in contrast to other tech companies like EMC (NYSE:EMC) that have managed to find a way to stay in the lead of major growth markets (data storage in the case of EMC). There seem to be echoes here of companies like Xerox (NYSE:XRX) and Motorola - before its split into Motorola Mobility (NYSE:MMI) and Motorola Solutions (NYSE:MSI). Cisco arguably needs to take a page from the likes of IBM (NYSE:IBM) or Hewlett-Packard - stretching out into new and interrelated businesses will likely incur the wrath of the Street, but recapturing growth leadership from the likes of F5 is not too likely.

The Bottom Line
Cisco is likely going to find praise for making hard decisions and facing reality, but the reality is that firing people is not a growth strategy. A 10% boost to earnings is all well and good, and it makes a certain amount of sense to fire workers the company cannot effectively use, but longer term success is predicated on pioneering new markets or taking back market share. Absent some reasons for optimism on growth, it will be hard to see how Cisco shares will outperform absent the occasional cash flow-based value call. (For additional reading, check out The Characteristics Of A Successful Company.)

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