Cisco Plans to Cut 5,500 Workers

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Cisco Systems Inc. said it would shed 5,500 employees�7% of its workforce�in the networking company's latest reaction to a shift in its core market from hardware to software.

The planned reduction renews a pattern of midsummer moves to reduce costs and make room to hire employees with new talents.

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Cisco's announcement along with its fourth-fiscal quarter earnings marks the most dramatic response yet to market changes by Chief Executive Chuck Robbins, who a year ago assumed the position held for two decades by John Chambers, who remains chairman.

The company said it expects to reinvest all of its cost savings from the job cuts into what it called "key priority areas." The layoffs will begin in the current quarter. Cisco also said in a regulatory filing that it expects to rack up pretax charges of up to $700 million for severance and termination benefits.

Cisco, based in San Jose, Calif., has long supplied a dominant share 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 classes remain its largest sources of revenue and have been slowing lately.

On Wednesday, Cisco said fourth-quarter switching revenue rose 2%, while revenue in its routing business fell 6%. In May, the company had said third-quarter switching revenue fell 3% and routing revenue fell 5%.

Over all, Cisco said its fiscal fourth-quarter profit rose 21% despite a 1.6% decrease in revenue. Shares of the company fell 0.9% to $30.45 in after-hours trading.

One major headwind has been slowing hardware spending by communications carriers, which have been struggling to hold down 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 said software-based approaches 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 has also been working on more offerings delivered as services, including forms of conferencing and collaboration.

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 reported fourth-quarter net income of $2.81 billion, or 56 cents a share, compared with profit in the year-earlier period of $2.32 billion, or 45 cents per share. Revenue fell to $12.64 billion from $12.84 billion.

The company also said first-quarter revenue would land between a decline of 1% to an increase of 1%, and it predicted adjusted earnings per share of 58 cents to 60 cents. Analysts are calling for revenue to fall 2% and adjusted earnings of 60 cents.

Write to Don Clark at don.clark@wsj.com