Chambers Push Into Servers Pits Cisco Against Hewlett-Packard
By Rochelle Garner
Aug. 6 (Bloomberg) -- Cisco Systems Inc. Chief Executive Officer John Chambers, facing four straight quarters of falling sales, is taking on the computer industry’s biggest companies to expand beyond networking equipment into computer servers.
Chambers said yesterday that revenue this quarter will fall at least 15 percent. To reach his target for annual sales growth of as much as 17 percent, Cisco is pushing into the market for computers used in corporate data centers, where it faces off with Hewlett-Packard Co. and International Business Machines Corp.
“There are times when you move into new markets, like the data center, and the incumbents view that as a challenge,” Chambers said yesterday in an interview. “IBM is a partner -- we’ll see how tight the partnership develops. That’s kind of a work in progress on both sides. H-P is clearly a competitor.”
Demand for Cisco’s routers and switches has slowed as companies such as Google Inc. and Microsoft Corp. respond to the recession by cutting back on gear for data centers, the rooms of computers that store information and run Web sites, according to Simon Leopold, an analyst at Morgan Keegan & Co. in New York. To counter that slowdown, Cisco last month began selling its Unified Computing System, a combination of computer servers, storage devices and networking gear.
Profit Pools
“They need more and bigger profit pools to tap into to keep growing revenue,” Mark Demos, a portfolio manager at Fifth Third Asset Management, said in an interview from Minneapolis. He helps manage $19.8 billion in assets, including almost 3 million shares of Cisco, according to Bloomberg data. “With the data center effort, they can go to a lot of companies that are existing customers and they are betting their good name can transfer into other areas.”
Cisco, the world’s largest maker of networking equipment, reported a 46 percent plunge in fourth-quarter profit yesterday to $1.08 billion, from $2.01 billion a year earlier. Revenue fell 18 percent to $8.54 billion in the quarter, which ended July 25.
Cisco, based in San Jose, California, fell 76 cents, or 3.4 percent, to $21.41 yesterday in extended trading. The shares have advanced 36 percent this year.
Chambers is making a winner-take-all bet by going after Hewlett-Packard and IBM, said Ray Lane, managing partner at venture capital firm Kleiner Perkins Caufield & Byers in Menlo Park, California. Hewlett-Packard and IBM sell Cisco’s network equipment -- relationships that may come under strain as the companies compete for clients, he said.
‘Win or Lose’
“I don’t question his strategy, but it’s risky because they are committing themselves to win or lose,” said Lane, the former president of Oracle Corp., who has known Chambers for about 30 years. “They will lose these partners as they compete.”
Sales of routers, which accounted for 17 percent of Cisco’s $36.1 billion in sales last year, will drop 20 percent industrywide in 2009, according to Dell’Oro Group, a market researcher in Redwood City, California. Revenue from switches, which made up about a third of sales, will drop 19 percent, the sharpest decline in eight years, the researcher said.
IBM, the world’s largest computer-services company, had about 30.7 percent of the worldwide computer-server market in the first quarter, compared with 28.8 percent for Hewlett- Packard, according to Gartner Inc., a research firm in Stamford, Connecticut. Cisco doesn’t feature in the rankings. Total server sales were $53.1 billion last year.
‘Cozy Partners’
“People are getting into each others’ business, and when that happens, people feel like their toes get stepped on,” Toni Sacconaghi, a New York-based analyst at Sanford C. Bernstein & Co., said at a conference in May. In the past, Hewlett-Packard and Cisco would work together to supply customers with products. “They were cozy partners before, and now they are competing much more aggressively.”
Chambers, who turns 60 this month, said the impact of losing sales through Hewlett-Packard won’t be “that great” because most of Cisco’s orders come directly from customers.
Gina Giamanco, a spokeswoman for Palo Alto, California- based Hewlett-Packard, declined to comment. Ian Colley, a spokesman for Armonk, New York-based IBM, also wouldn’t comment.
IBM still works with Cisco in markets where they don’t directly compete. The two companies, for example, are working together on so-called smart grids, providing meters and other networking gear to power utilities.
Work in Harmony
“If it was up to Cisco, they’d much rather work in harmony with these companies,” said Brian Halla, a Cisco director and CEO of chipmaker National Semiconductor Corp. in Santa Clara, California. Chambers typically wants companies to cooperate rather than fight, he said. “At the same time, Cisco is so determined that they won’t let anything stand in the way of the bigger vision” of finding new markets, he said.
One challenge for Cisco will be persuading clients to buy one product that comprises storage, networking and servers. Customers typically have different managers responsible for making those purchasing decisions, said Jayshree Ullal, CEO of startup Arista Networks Inc., who worked at Cisco for 15 years and reported to Chambers. The global recession also may complicate Chambers’s plans, she said.
“Everyone retrenches in a bad economy, so his timing might be off,” Ullal said in an interview from Menlo Park, California. “This is by far his most difficult endeavor.”
30 Markets
To meet Chambers’s goal, Cisco has laid out 30 new growth areas. These include consumer and video products, as well as smart-grid equipment. Chambers said yesterday he plans to go after even more markets.
In May, Chambers said he expected to use Cisco’s cash to acquire companies to get into those areas. The company had $35 billion in cash at the end of last quarter.
Chambers, who was born in Cleveland and raised in Charleston, West Virginia, joined Cisco in 1991 as head of sales. He became the company’s second CEO in 1995, steering Cisco through the Internet boom and the crash in 2000.
A fan of duck hunting, Chambers speaks with a pronounced West Virginia accent. Before Cisco, Chambers spent eight years at computer company Wang Laboratories and six years at IBM. He has a bachelor’s and a law degree from West Virginia University and an MBA from Indiana University. “I never intended to get into law,” he said.
Cisco is going after markets that are all linked to networking and sharing information, said Carol Bartz, CEO of Yahoo! Inc. and lead director at Cisco since 2005.
“John has a really clear vision, and he organizes the company around the vision,” Bartz said in an interview this week. “He inspires the naysayers.”
Chambers says Cisco has anticipated changes in its business in the past. In 1998, the company paid $145 million for Selsius Systems Inc., acquiring equipment that handles phone calls over the Internet. Cisco’s revenue from that business passed $1 billion in 2005.
“We are very good at catching market transitions, and as we do that we usually take our partners with us,” Chambers said. “But as you move into new markets you often make new partners.”
To contact the reporter on this story: Rochelle Garner in San Francisco at rgarner4@bloomberg.net
Last Updated: August 6, 2009 00:01 EDT |
