Cisco Systems Inc. beat Wall Street’s expectations today as it delivered its second-quarter earnings report, but its stock fell in extended trading after it offered light guidance and revealed plans to lay off 5% of its staff, or about 4,250 workers.

The company reported earnings before certain costs such as stock compensation of 87 cents per share on revenue of $12.79 billion, down 6% from a year earlier. The results were better than expected, as Wall Street had pegged the company for earnings of just 84 cents per share on sales of $12.71 billion. All told, Cisco delivered net income of $2.63 billion, down slightly from the $2.77 billion profit it recorded one year earlier.

Cisco Chair and Chief Executive Chuck Robbins (pictured) hailed the company’s “solid second quarter,” noting it delivered strong operating leverage and capital returns for investors. Robbins wasn’t specific about where the layoffs are, saying only that “We continue to align our investments to future growth opportunities” — in particular, of course, artificial intelligence.

Although Cisco managed to grow its revenue in its collaboration, observability and security segments, sales in its core networking business dipped 12%, to $7.08 billion. Overall product revenue fell 9%, while services revenue rose 3.5%. Sales fell 4% in the Americas, 7% in Europe, Middle East and Africa, and 12% in Asia-Pacific, Japan and China. According to Cisco’s executives, product orders were down 12% from a year earlier.

The planned workforce reduction was announced as part of a restructuring plan that aims to realign the company and “enable further investment in key priority areas,” the company said. The plan will see Cisco hit with charges for severance and other expenses of approximately $800 million.

Cisco thus becomes the latest big technology firm to announce plans to continue downsizing this year, at a time when the industry continues to trim costs in response to a market downturn that began two years ago. Last month, Alphabet Inc., Amazon.com Inc., Microsoft Corp. and SAP SE all announced their own plans to eliminate positions. Smaller tech firms such as Okta Inc. and DocuSign Inc. are also laying off more staff. To date this year, 144 technology firms have laid off a combined 35,000 workers, according to data from Layoffs.fyi.

Cisco officials said the company has yet to close on its blockbuster $28 billion acquisition of Splunk Inc., but the deal is now very close to being finalized, and they expect it to be completed in the current quarter.

As for guidance, Cisco said it’s targeting earnings of between 84 and 86 cents per share on sales of $12.1 billion to $12.3 billion in the third quarter. That’s some way off the Street’s consensus estimate, with analysts forecasting earnings of 92 cents per share on revenue of $13.09 billion. Cisco’s stock fell as much as 9% at one stage following the report, though it has since clawed back some of those losses and was down over 5% at the time of writing.

Cisco also updated its full-year forecast, saying it now sees earnings of between $3.68 and $3.74 per share on revenue of $52.5 billion. That’s also below Wall Street’s forecast, with analysts looking for $3.86 in full-year earrings and $54.26 billion in sales. The guidance excludes any impact from Splunk.

On a conference call with analysts, Robbins laid out the reasons for the company’s declining revenue and weak forecasts, saying that its customers are still working through a pile-up of networking hardware inventory, hence they’re buying much less than before. The company had said in its previous earnings call in November that it was facing an inventory glut that would likely result in reduced shipments for the next quarter or two.

According to Robbins, the company is seeing “a greater degree of caution and scrutiny of deals” than it usually does given the uncertain environment. It’s taking longer than expected for customers to clear their inventories, and that process won’t be complete for another quarter at least. In addition, the company is faced with weak demand from telecommunications and cable customers, which are traditionally two of its biggest customer segments.

“As we’re hearing this from our customers, it’s leading us to be more cautious with our forecast and expectations,” Robbins told analysts on the call. “Second, as we discussed last quarter and subsequently saw in other technology provider results, customers have been taking time since the start of our fiscal 2024 to deploy the elevated levels of products shipped to them in recent quarters, and this is taking longer than our initial expectations.”

The problem for Cisco is that although its nascent collaboration, observability and security businesses are growing, they’re not doing it fast enough to offset the continued decline of its networking business, said Holger Mueller of Constellation Research inc. “It’s pretty clear why Cisco wants to buy Splunk, as that will enable it to start growing again,” the analyst said. “Unfortunately, the declining revenue means more employees are being let go, especially as Robbins and team are so committed to maintaining profitability and earnings per share. All eyes will be on the third quarter to see if Cisco’s new bets can make up for the decline in networking.”

Analyst Charles King of Pund-IT Inc. told SiliconANGLE that Cisco has been in this position before, as sales of networking hardware tend to be cyclical. He said he expects the company will struggle until those issues are resolved, though its prospects in the longer-term do look better.

“The company is working through these issues as it should, but it is also laying the groundwork for new market opportunities with the Splunk acquisition,” King said. “Additionally, while Cisco’s layoff plans will be painful for the impacted workers, the company is doing the right thing in terms of getting its financial house in order.”

Although investors are looking unenthusiastic, Third Bridge analyst Joe Brunetto said that Cisco’s longer-term prospects are more important than its near-term results, noting that its customers should resolve their inventory backlogs by the second half of this year, or early 2025 at the latest. “Based on our conversations with experts, looking out long-term, the major question remains how the HPE/Juniper deal will impact Cisco’s business,” Brunetto said, referring to Hewlett Packard Enterprise Co.’s announcement in January that it plans to buy Juniper Networks Inc. for around $14 billion in an all-cash deal that’s expected to close later this year.

King said he doesn’t believe Cisco has much to worry about in the long term. “I don’t believe HPE’s planned acquisition of Juniper represents an existential threat,” he said. “Cisco’s networking business is and likely will remain significantly larger than Juniper’s, and while HPE could gain some traction by incorporating the company’s technology, I expect a substantial portion of its systems will continue to ship with Cisco’s switches.”

The company also announced its increasing its quarterly dividend rate by 3%, to 40 cents per share, up from 39 cents. In the last quarter, the company repurchased almost $1.3 billion worth of stock.

Photo: Fortune GLOBAL FORUM/Flickr