Arik Hesseldahl

Recent Posts by Arik Hesseldahl

Seven Questions for Cisco Systems CEO John Chambers

Shortly after he concluded his quarterly earnings conference call Thursday, Cisco Systems CEO John Chambers called me up — upbeat and understandably so.

Cisco appears to have continued its recovery following a painful restructuring. Sales are up and setting records, earnings beat the consensus of analysts, and Cisco’s outlook for the coming quarter is positive, too. Cisco’s even reached a point where it’s at least close to fitting into its old skinny jeans. What a difference a year makes. Last year it was all about gloom and doom and some irritable investors were calling for Chambers to lose his job.

Since then the company has undergone a painful but necessary restructuring, shed thousands of jobs, shut down marginal business units and refocused on its core businesses, and as yesterday’s quarterly earnings report proved, the results are not only starting to show, but starting to stick.

So is the work done? Definitely not. Yes, Cisco is showing some return to its strengths, but there’s still a long way to go. We talked about that, the troubles Cisco’s competitors are facing, his long-held view that companies like Cisco should get a tax holiday to repatriate their cash held outside the U.S. and many other things.

Also Chambers, remembering that I dedicated “How Ya Like Me Now” to Cisco last quarter as it turned the corner on its troubles, asked me what song I might use to characterize its results this quarter. Taking inspiration from the headline of my first story and from his cautiously optimistic tone, I settled on “It’s Getting Better All The Time,” the Beatles track, performed by Paul McCartney and embedded after the Q&A. Enjoy.

AllThingsD: John, I don’t know if you saw the headline I wrote earlier, but I said you fit into your skinny jeans again. Is that fair?

John Chambers: [Laughs] I think it’s fair. We were up about four or five inches there so I think we have an inch or two to go, but we’re getting close.

So let me ask about the quarter. It looks like a solid quarter where a lot of the troubles were starting to get behind you. In broad brush strokes, where were Cisco’s strengths? I know some of your competitors were having their own troubles, but where were you strong in particular?

The strengths were that we appear to be executing on the market transitions that are going on, and we appear to be reinventing ourselves, not just in terms of how we control our costs, but in terms of the productivity we’re getting out of our employees. So if you look at the major transitions going on in the industry from an economic point of view, to how customers buy, to where the high tech industry is going, which I would argue is all connected to intelligent networks, that all appears to be playing out as we had hoped. The other transitions that you think about, like data centers and the cloud, we saw 90 percent growth in an industry that is growing at best in the teens. Our ability to move in collaboration, where we grew 10 percent though I think we could do better — it remained solid for us. In video with set-top boxes up 23 percent to new video technologies growing well and seeing improvement in the margins. There are things we need to do to reinvent Cisco. I think I said this at your own conference a decade ago [Chambers spoke at D5 in 2007, but that is not where he made this comment. -Ed.] that voice will be free. It’s almost there. You could see the trend, and what it meant is that once voice would become a smaller part of the network load, that would be given away in order to make way for the video and the entertainment. The same trends are taking place all over again at multiple speeds and multiple gears, which if we’re right, they all play together. Everything from mobility to cloud to the intelligent network, to wireless to security, to video being pervasive, all of those are coming together at tremendous speed. And we’re pulling them all together pretty well for our customers. Now, this is just the beginning if we execute right, and we have plenty of hurdles in front of us, but this may be the voice-will-be-free trend times 10 in terms of the impact of the transitions going on. We appear to have managed them well; we did what we said we would do, turned in record earnings and record revenues, and earnings per share were up 48 percent. We’ve realigned ourselves and reinvented the company, which I think you have to do every five years. Sometimes it takes a crisis to reinvent. … It’s a journey and we’re just getting started.

What’s the number one hurdle that you want to get over this year, that’s in front of you right now and keeping you up at night?

I want to build deeply into our capabilities, a continued focus on gross margins and effectiveness, from product design to sales all integrated together. You probably know this, but we’re the only company who’s anywhere near this profitable with $45 billion in sales with open standards. It isn’t a mainframe business where everything is proprietary or like in Apple’s situation where it’s a wonderful company but it has an architecture. We do it entirely with open IP, so we can be challenged by a 10-person start-up or a by the biggest giants like Dell or IBM or Hewlett-Packard to come at us. With this type of margin but so low a barrier to entry, we’re doing relatively well. But we still have to reinvent ourselves at a faster pace. We have to do what I call the basic blocking and tackling to participate in the new capitalism that we’re heading into. That’s the attention to gross margins, getting the market transitions right, tying the products together so you can get the price premium on them. But what really keeps me up at night this last year was the realization that this has to be constant reinvention. Average is over. An average high-tech company is headed down. Those above-average companies are going to head down in 3 to 5 years. If as a company you can’t reinvent yourself every 3 to 5 years, you have a problem coming at you.

Does that then imply that Cisco had become complacent or even average? It was and is the biggest networking player, but did Cisco lose its way and try to do too much?

Well, I could give you a long list of things we have to do better. We’re a healthily paranoid company so we always have things we could do better. I do think we were fat. Four to five inches, not just one or two. We’re not back in our skinny jeans yet, as you put it, but we’re within an inch or so of getting there. We missed market transitions at the speed at which they occurred. We should have seen the drop-off in public spending coming at us sooner. Everyone else has still run off the turn, even though they saw what happened to us two to four quarters ago. We should have seen it sooner and reinvented ourselves before it hit us, and made the turn much more effectively, and I’m committed to doing that, and the leadership team is, too. It would have been easy to just cut a billion dollars in expenses, reorganize sales and how customers buy. We realized that gross margins can deteriorate not just because of what competitors do but what we do to ourselves, like what we did on switching. We should have been smarter there.

On the conference call you mentioned the possibility of getting back into the mergers and acquisitions game. Any hints on where you might go or whom you might buy?

I think it’s a fair question. Part of the reason we said that was to explain why we’re building up cash in the U.S. Part of it was for share buybacks because the price was attractive. A lot of people don’t realize that we use M&A deals to gain leadership. We were a routing company, we acquired three switching companies. We were an enterprise and commercial company, we acquired a service provider company in Stratacom. If you look at where it’s going to be, it’s probably in data center, collaboration and video, and combining those with security, bring your own device and mobility. A large part has to do with our government allowing us to bring money back to our country.

That’s always been a big issue of yours. You made some comments about it on the conference call as well. Care to elaborate?

I think that it’s going to happen in the next presidential administration whether the president is re-elected or someone else is. I’ve been disappointed that we haven’t been able to get our message out about this more effectively. Ironically, I was in Europe, the government leaders there look you right in the eye and ask what they need to do to bring jobs to their country and keep the ones they have. They are partnering with business. I think we’re following Europe in the wrong way and following more of what they did to get them in trouble in the first place.

There’s a bit of a disconnect, however, to anyone who sees on one hand a company that wants to bring cash back in a tax-advantageous manner in the name of creating jobs, while the same company just fired so many people in the restructuring. Can you connect those dots for the person who sees the apparent logical disconnect? If it’s about jobs, then why are you firing people in the first place? If you were having lunch with President Obama or any other political leader, they might be confused, so how do you explain it?

They’re related. The first thing you’ve got to do when you hit bumps in the market is find out how much of the damage was self-inflicted and how much was the result of the conditions of the market. It would be a cop-out to say it was all the general market. We had to look at what we were doing internally. Every government leader in the world who’s adding to government payrolls and adding government debt is going in the wrong direction. We have to use technology to deliver services better. You do see most government leaders saying they want to get their own houses in order. The second thing they do is look at ways to generate private sector jobs. I’m a strong Republican, but I think President Clinton got it right with business and knocked the ball out of the park. He partnered with business, he was critical where appropriate, but in six years he generated 22 million jobs, grew GDP on average by 4 percent per year, and he was America’s champion on the Internet. I think that’s a more practical example. He grew private sector employment versus government employment by a ratio of 9 to 1, and created a positive climate for business, and when business got out of line he’d whack ’em. I think it would be a major mistake not to let companies repatriate their cash because whoever is in the Oval Office next year is going to want to get private sector jobs growing again, and there really aren’t very many levers left to pull. We’ve never had this slow a recovery after this deep a recession.

Getting Better – Paul McCartney


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