Cisco chief exec looks to the future BY JENNIFER FILES Mercury News
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John Chambers' message is clear: The layoffs are over, the soul-searching largely done. After five excruciating months for the company that had never before had a rough month, Cisco Systems is getting back to work.
``It was the most challenging business environment that you would imagine, from January through May,'' said Chambers, chief executive officer of the networking industry's once-brightest fallen star, in an interview last week.
Now, he said, ``I'm having fun again.''
Fun, despite the downturn that has bashed the economy and his industry and that he can't see an end to. Fun, though he is facing a firestorm of intensely personal criticism that he failed to anticipate the steepness of the downturn and even now is far too optimistic about Cisco's prospects. Fun, even after the pain of eliminating 8,500 jobs -- about 15 percent of Cisco's workforce.
Fun, because John Chambers, the consummate salesman, says he is beginning to concentrate on customers again. ``It's back to the basics in many ways...`What do we have to do to win?' That is fun.''
Many who study Cisco and its industry say the more important question is, ``What is there to win?'' They don't see much to be excited about.
``I'm not certain when all is said and done that we don't have another four or five quarters of year-over-year declines'' in Cisco's revenue, said Sanford Bernstein analyst Paul Sagawa, who last fall provoked controversy by forecasting the reversal of fortunes that most experts, including Cisco's leaders, did not recognize until this year. ``It has nothing to do with Cisco's execution. It's simply the market.''
``There seems to be no acceptance on Cisco's part that there really was dramatic over-investment'' in the equipment it sells, Sagawa said. He sees little reason that phone companies and businesses that have adequate networks now will spend vast sums on next-generation gear, and other analysts agree.
The Internet -- and burgeoning telecommunications industry competition -- sparked a massive buildout in the late 1990s that experts say resulted in far more capacity than is needed. Even where there are network bottlenecks, the recent decline in telecom competition means phone companies are under less pressure to spend.
Chambers continues to predict that once the economy recovers Cisco will return to its traditional growth rates of 30 percent to 50 percent. Many analysts believe that's way off target.
``In the service provider market, I am absolutely convinced that people are too positive about the market,'' said Steve Kamman, networking analyst for CIBC World Markets.
Chambers has beaten the experts before. When most of the tech world was focused on e-commerce, he correctly said that other, less glitzy networked applications would become a huge business. And while rivals were pulling out of Asia during its economic troubles in the mid-1990s, Cisco kept investing, increasing its market share in the process and giving it a better position once the economy there recovered.
Cisco's layoffs, in April, were its first ever and following repeated assurances by Chambers that he would not cut jobs for economic reasons. ``Never say never,'' Chambers now says, but one round of cuts appears to be enough for Cisco to weather the current downturn. ``At a time when many of our peers are continuing this process, we've already completed everything.'' Several rivals, including 3Com, Lucent Technologies and JDS Uniphase, have announced multiple rounds, or expect to.
``You do it once, if you can,'' Chambers said. ``You cut deeper than you thought you needed to at the time. That usually is what you needed to do, anyhow.''
Cisco has projected that its quarter-to-quarter revenue growth will be flat to down 10 percent for the three-month period that ends July 28. Chambers would not say last week whether that estimate is still on target -- the company next reports earnings Aug. 7 and generally does not comment on results during a quarter.
More broadly, he said the economic signs are mixed. ``Consumer confidence and consumer spending are actually holding up pretty well in the U.S.,'' he said. ``However Europe and Asia/Pacific are continuing to weaken. The element here is, rather than worrying about whether the market is growing at 30 percent or shrinking at 20 percent, to focus on the available market, and how much of that did you get at a good profit margin. That's what we've got our whole company focused on.''
Analysts agree that the trends rocking the communications equipment industry could work in the San Jose company's favor. Cisco is strong enough to benefit from the widely predicted consolidation. ``The one thing you can be sure of is that Cisco is a survivor,'' Kamman said.
And while rivals including Lucent Technologies struggle to manage debt, Cisco has none -- instead, it carries $17 billion in cash and relatively liquid investments.
The breadth of Cisco's product lines has buffered the company somewhat from the downturn in spending by phone companies. Business customers, Cisco's traditional bread and butter, reduced spending less sharply.
And Chambers, who expects businesses and phone companies to increasingly choose a single vendor for communications equipment, says that the breadth of product lines Cisco sells will allow it to win that business.
But while it can be a huge advantage, Cisco's size is a mixed blessing.
``What has buffered Cisco most effectively is both our balance across multiple industry groups as well as our geographic balance as well as our product balance,'' Chambers said. ``That's a two-edged sword. When you have 50 percent market share and you're balanced across the world, by definition if a market gets soft, you get affected.'' |
