Spotlight Cisco: Reviving an American Icon

Thanks everyone.

Thank you, Bolaji, and thanks very much to everyone. This was a great discussion. I really enjoyed it.

Alex, Thank you for taking the time to chat with us. It's been a pleasure. Hope you'll join us again in the near future.

I tend to look at things more through a technologists and reporters eyes rather than investors. On the first two, I am optimistic. I believe Cisco has the people and technology to succeed and that the cloud strategy will pay off. But it's going to be a long course. No 3-month or even 6-month fix

I would buy Cisco now but that would still be taking a chance on the company because its stock price could still decline if the reorganization is not considered a success.

That doesn't indicate any level of confidence in the reorganization.

Alex, Any final comments or takeaways for us about Cisco. I noticed you didn't address how investors should approach this.

well, Cisco is trading at the low end of its 52-week range. At 16.60 right now. 52 wk high was 27.74

I'd expect to see Wall Street light a fire under them if they take what is perceived as too long

Agreed, Anna.

It's going to come down to wait and see. It's too early now to see the results of what Cisco is doing. Let's hope the company get it right otherwise the impact if it has to embark upon another reorganization would be more negative.

As in, how quickly is Cisco really moving

Hawk, I think we don't have real visibility yet into what Cisco is doing internally to implement the changes -- streamlining, etc -- that Chambers called for in his email to employees.

A slight tangent, but I also want to point out, it'll be interesting to watch in 2011 what HP does in networking, in that HP has a new CEO and also they're in the midst of rebranding their networking equipment, moving it out from under the HP Procurve brand into HP proper

Alex, If you don't mind my circling back to a point raised earlier. What's next then for Cisco and Chambers? Has Cisco mapped the most effective strategy for moving ahead or is it spinning the wheels?

Excellent point, Bolaji. It seems odd that Cisco hasn't capitalized on the expansion in the Far East. At the same time, they may be facing regulatory issues such as Huawei is fcing here, but I haven't heard anyhting like that...

Thanks, Alex.

That's a good point, Bolaji. I don't know enough about the Asia-Pacific market to answer.

Cisco, Barbara.

Is Cisco developing the IP or is that thrid-aprty?

Alex, There's a connection between the marketing issue raised by Steve and the problem of expanding in Asia. The company needs a much bigger turnaround program than Chambers is acknowledging. This may seem a stretch but the weight of its sales leans too much towards the West while Asia is also growing fast. With a marketing plan that understands all the challenges Cisco may be able to win also Asia-Pacific. Has the company admitted the challenge of Asia and how it might increase sales in the region?

i meant, software BEHIND (as in, inside)

it's really that the software being networking equipment is so complicated, that's where the real IP is

Got it. Thanks

There's enough secret sauce in there though that Intel can't come in and say, ok just use x86 blocks.

I meant that the volumes aren't there for someone to peel that off as a sep biz. Cisco and Juniper do custom silicon for their switches etc. where the volumes make it economical, and then use ASICs around that where the volumes won't support a full custom part

Cause people always bash Cisco for supposedly being "proprietary," but in networking that doesn't hurt as much as elsewhere, because the cost of entry, expertise-wise, is so high.

I'd like to hear more about the semicondcutor side of things. Alex, when you say economies, do you mean in terms of the demand, or that they economies of scale don't exist on the production side?

to try to grab developers..

That kinda speaks to the point about all network hardware becoming commoditized. It's interesting to me in that regard how Juniper has tried to position itself as "open" as far as networking OS.

No, I wasn't aware of the Intel angle

Ah, good point Anna. And we haven't talked abt the semiconductor angle of networking, which is interesting but hasn't risen to the fore cause there's no economics there to make a biz out of it . (did you know that Intel has done internal stuff where you can build routers out of x86 blocks?)

Barbara, Yes. Huawei faces the same daunting challenge in the US and in Europe as Cisco is facing in China and India.

You cannot win anymore solely because you've got great hardware. By the way, I see many articles focused on software on EBN, which tells me this is an increasingly important area for all companies. Even in the semiconductor area suppliers are offering so-called system on a chip, another fancy way of saying we'll help integrate software into our products. Also, companies like Freescale are hiring not just design engineers but also software engineers.

Re Boston, I always analogized Boston to Seinfeld, in that they were a band about nothing...

But I digress

Re router/switches not from foreign suppliers, that's a good point but in some sense wishful thinking that this will prevent back doors, which you don't have to be a conspiracy theorist to assume are already in there.

Well, I'd give Juniper maybe Boston's debut album, aptly named "Boston" but not Abbey Road

hey guys, much as i've enjoyed chatting i have to run - ciao

Bolaji--you man like Huawei faces in the US?

Abbey Road: that's practically blasphemy! What next? "Bigger than God"???

Question for Alex and/or award-winning Bolaji: How is Cisco appraoching the Far East, and how can they do better?

Oh, my. In house marketing at Cisco, which is a company where you don't go against consensus. A prescription for disaster, if someone fields a plan that is to marketing what the Aztek was to Pontiacs

I have a few conjectures on this. The router/switches business is not one that many governments want to leave in the hands of foreign companies. When it can be avoided national governments encourage the participation of local businesses they feel they can trust or even control in such areas, hence the rapid growth of Huawei. To win in China, Cisco will have to evolve its national identity beyond being an American company. Even then it may not be completely trusted. That's a dilemma the company may not overcome.

Abbey Road--lol someone needs some perspective

lex: brilliant segue totalk about marketing. Did you know that Cisco has brought alot of their marketing inhouse? I think this is an absolutely huge mistake. They really need the benefit of third parties to endorese and qualify their claims and positioning.  

That's an important observation, Bolaji, re Asia.

Award winning Bolaji: why is that?

Absolutely, Steve. But they also don't quite have the marketing rap down the way Cisco does. When I went to their big press conference over a yr ago, when Juniper announced they were getting on the NASDAQ, their big analogy was how this move was as momentus as the release of Abbey Road. Now, I love the Beatles, but...

i like the idea of using hardware to make a cloud entree. Strategically thast makes lots of sense.

Here are a few numbers related to Cisco's sales by region. In the first six months of its current fiscal year (ended Jan. 29) the company reported total sales of $21.57 billion. More than half of that ($11.4 billion) was from the United States and Canada; $4.1 billion was from Europe while Asia/Pacific, which included Japan represented only $3.2 billion. EMEA was even lower at $2.4 billion.

What this tells me is that whatever expansion is happening in Asia, Cisco is getting not as much of it as it is getting in North America and Europe. Who is winning these sales and how can Cisco get in on the action because on a longer-term basis it cannot afford to continue to be a local champion in North America and Europe. Most other companies in the hardware space are generating more of their sales from outside North America.

Steve -- (of the awesomely supportive DeusM suite) too true. Hardware companies must offset that with a supporting service offering. That is one aspect of Cico's business I am not familiar with--what types of ervice do they offer in suppoer of their hradware?

Juniper - now there's a story. They certainly have a HUGE Napoleon complex. I deal with them all the time whe i was CEO of light reading and my god you could really set their marekting people off by saying things like "when will juniper be considered an incumbent like Cisco"?

lol!

Steve, that's one thing I see Cisco trying to do with cloud, as I mentioned earlier, using hardware sales as a entree toward services, but cloud setup services as opposed to selling metered CPU time

One other thing that interests me is Juniper, which has tried to articulate a broad vision, a la Cisco, but doesn't seem to be able to get the love from the press that Cisco does. So Juniper is more sotto voce..

the question is: what is to be done. IBM was able to reinvent itself as a yet more effective company byt switching missions from software and PCs to services. Can Cisco follow suit?

we need to look ten years out and see where these trends take us... Cisco WAS a money machine. Now, less so. I sense a disaster on the horizon. It's desperately trying to reinvent itself but it's not taking.

Ah i see great minds think alike..

To me, the one insoluable component of the equation is, how can Cisco maintain their status as what's effective the premier (high end, high margin) networking supplier in what Steve has rightly pointed out is a market that's commodity.

Hi Barbara (of the award winning EBN site!) - i hear you on the hardware stuff but the problem (and it is a hge problem) is that the margins are not there now. Cisco used toget away with charging $100,000 for one T3 router port, now you can get a gig for a $1000. There are vanishing margins in that line of business!!!!!!!

Alex--short answer, yes. Cisco is the 800 pound gorilla in the supply chian, and suppliers will do anything and everything they can to accommodate Cisco.

Certainly. Suppliers must be wondering by now what their fate would be. It's always disruptive to a company's manufacturing operation and you can bet many of Cisco's contract manufacturers would be desperate to know the details of the company's reorganization plans.

That's a very good point, Bolaji. I'm not familiar with the strength of Cisco's Asia presence. Something for me to look into.

Barbara, what effect will Chambers' plan have on Cisco's supply chain. Will there be more (perhaps unreasonable) pressure, the cost cutting falling on suppliers?

Alex, if I can take you up on the competitive landscape. Cisco is heavy in Europe and North America. A greater percentage of its sales come from these two regions and it is facing strong headwind in Asia, which is where the next wave of infrastructure spending will come from. Don't you see this as a problem longer-term?

I gotta add another plug for hardare, folks--that is EBN's bread and butter. Manufacturing is still alive and well--maybe on in the US, but I do not agree hardware is a losing proposition

One thing we haven't talked about is the competitive landscape re Cisco, and I think that's telling. Cisco does have a LARGE footprint, everyone else is just nipping at their heels. Except in servers, where Cisco is the new kid, nipping at HP and IBM

I hear you, Steve, but there is still a need for hardware and if you have the infrastructure for manufacturing, as Cisco has, you will still have a lot of room to grow. Look at all the competition out there already for the software/services standpoint--I think there will be a very rapid decline in population there. Hardware isn't something you can just up and do, some service offerings don't have that level of start-up cost

Also when you listen to Cisco events, everyone speaks to the same talking points. Which is par for the course, but I wonder how vigorous the internal debate is.

i think the impact of him leaving now would be worse than him staying but i also agree with Alex that he needs a bigger stronger bench. I mean, talk to any one in tech and ask them who they know at Cisco and they go "Chambers" then there's a long pause. Mike Volpi was good but he left (didn't he?)  

Exactly, I believe the entire electronics market is prone to commoditization, including so-called high-end products. The danger is that many companies fail to realize this early enough. Cisco is not competing on the strength of its software but on the strength of the speed and resilience of its hardware. That's a long-term losing proposition. In today's world, businesses and consumers expect great hardware -- they take it as the basic foundation for products. It's the software, the interface that wins them away from one supplier to another.

Steve, if Cisco is successful in doing "cloud in a box," the will effectively straddle hardware and services, in that they will first sell hardware but then also offer tools to enable customers to get quickly into the cloud.So this might enable them to have an entree into services as their next big revenue stream.

I don't believe so, not til a successor is in place, cause right now Chambers is too interwined with the company. But the board must force him to plan for succession

and that's a big mistake. because the entire history of comms tech shows a trend away from infrastructure and towards software and services in terms of where the MONEY is!

Steve, there are people who have mentioned clearly that they believe it's time for Cisco to get a new CEO. Would you and Alex agree to that? Is it time for Chambers to depart?

Alex: exactly

So re cloud, Cisco is really trying to be to the cloud what Intel has been to the PC for the past 30 years

the thing about cloud is that it is the ultimate commoditized service. also, the entire point of the cloud is that it doesn't matter who'se kit the services run over. Also, the money in cloud  is in services, not infrastrcuture, and Cisco is still an infrastructure player

Alex--got it. Thanks!

Barbara, the difference here is that Cisco is trying to carve out a niche as provider of cloud "technology in a box," as it were. Not cloud services, but the switches, routers, API set up etc.

Stve--Spenser Hawk could kick ass with a mere glance

all three add up to: poor judgement

No, this is the real Hawk. If I can pursue Steve's question further, even the most powerful chairman/CEO does not determine his own compensation package. Cisco's compensation committee decided to award him the 2010 package despite the company's slide. And, also what credits or discredit should the board of directors receive in this case?

To me there have been a few big tipping points for Cisco recently.

1. falling price of routers (I mean, basically they are free compared to whast they used to be)

2. infatuation with vidconferencing as a replacement  high margin business, which it just isn't (and won't be for 6 years)

3. Flip catastrophe

I agree about the cloud, Alex, but aren't so many other companies already there? I mean, they aren't Cisco, but the cloud is becoming pretty populated already

Anna, you are correct, though I would point out that Cook has come to the fore as a result of circumstances (Jobs's poor health) rather than deliberately being brought forward.

And touche Steve re Hawk...

Spenser Hawk would have just kicked Chambers ass

I believe Cisco's near to long term plan to essentially productize the technology which powers cloud computing is a very smart strategy.

Steve Jobs might have done better considering he has had a COO (Timothy Cook, I believe) for years and the COO has been involved in managing the company thrice during Jobs' absence.

OTOH,

So they could fix all the decision-making bottlenecks--their most immediate issue, and the one which Chambers appears to be addressing--yet still be left w an earnings issue as far as Wall St. is concerned.

Cisco's ongoing problem, one they won't be able to correct this round, is that they've always been dependent on very high margins (and attendent high price points).

One other point:

Getting back to Steve's point about Chambers, and also what Hawk (not Hawk from Spenser?) writes, I find it a real lapse that he, while he has a very deep exec bench, he's done a Steve Jobs, not grooming a next chairman. And I agree w Hawk abt the finger pointing, cause the biggest lapse--the councils--was Chambers' idea.

Cisco Inside, so to speak. Makes sense. Or even along the lines that Bosch went--we make the things that make things better

I was wondering also about the executive package too. Also, in the letter written by Chambers, which Alex referenced in his article, it seemed he pointed all his fingers in every direction but towards himself. Doesn't a chairman and CEO deserve some blame for the situation at his company?

Barbara, pulling the plug on Flip will hurt Chambers' goal of building Cisco's name w the general public -- he wants to do what Andy Grove did with Intel in the 1990s. w those "ba-bum-bum-bump" commercials.

He can't, Steve. And he also can't justify the fact that he hasn't groomed a successor.

To Anna's point: My perception is that the Flip is the closest people on the street got to Cisco--in other words, we know they are out there in the networking space

My impression is that users rally loved the Flip

Will this hurt Cisco?

Hi Alex, how can Chambers justify paying himself twice as much this year as last year when the results are as they are?

Steve (not a cisco investor)  

I was reviewing Cisco's financial numbers and wondering why Chambers is cutting off some business units. Revenue still seem to be growing?

No, I am not a Cisco investor. I wish I had bought some of its shares years ago, however.

Anna, are you an investor in Cisco?

I believe Cisco's plan now to refocus on its core strengths -- networking -- and to pull back on consumer will go a long way towards fixing things

Six months sounds reasonable given Cisco's size, but Wall Street is impatient. I hope they get six months.

Good point, Anna. But I think Cisco's problems are largely those resulting from size, a company that's become too big to respond quickly. Like IBM was at one point

Alex, Isn't a "Wall Street problem" the first sign, though, of a much bigger problem that hasn't really been identified by common people on the street?

What is your sense that the Cisco shareholders hold the same opinion as Wall Street?

Regarding time frame, that's a very good question. Chambers has not committed. I'd say they need to show progress within 6 months

That said, Cisco does need to streamline its operations and cut costs

I believe the situation is being blown out of proportion. It's more a Wall Street problem than a true prob

Hi Bolaji and Alex

What kind fo time frame do you think we are talking about in terms of Cisco's reorganization?

I would like to start the discussion with perhaps the question on everyone's mind. In your opinion, how much trouble, if any is Cisco in or is the company's current situation being blown out of proportion?

Thank you for agreeing to engage with our audience about Cisco.

Hi Alex

Hello, everyone. Alex Wolfe here, looking forward to chatting about Cisco