Chambers Says Internet Promise Not Broken

When Cisco CEO John Chambers spoke this morning in Las Vegas to a packed house of business partners from around the world, the lanky, sandy-haired executive hoped to restore confidence among the company's faithful followers.

The long-term hope and promise of the Internet revolution has not been diminished, he told attendees of this week's annual Cisco partner summit meeting. But the near-term future looks bleak, nonetheless, he conceded.

Ironically, while Chambers highlighted the opportunity for partners to advance their businesses through affiliation with the company, Cisco investors, along with the rest of the market, were taking a beating. At midday, the Nasdaq composite index was off by more than 5 percent. Cisco shares, meanwhile, closed down by more than 8 percent, hitting a 52-week low ($13.75) that just a few months ago would have been unimaginable. Late last month, shares traded near $20 per share.

Unbowed by the downturn, Chambers went on to outline why he thinks Cisco, with help from its business partners, will gain market share though this difficult market transition. "Transitions are where you break away at tremendous speed," he said. "All of us enjoy the good transitions more. They are more fun; they are more challenging. But where you gain market share, unfortunately, is always during the tough transitions."

He went on to predict the current transition will likely result in the demise or merger of many companies, including as many as half of those currently listed on the Fortune 500 annual ranking. What's driving the change, he said, is a simple drive for survival. He, for one, embraced e-business because he needed 2,000 people in custom support at a time when his budget would only allow him to hire 2,000 people companywide. Numerous other organizations are doing the same as they face the economic realities of today, he said.

For the long-term, that means great things to makers and suppliers of information equipment and know-how. "The infrastructure payback from the Internet infrastructure build-out of companies and countries will be the equivalent in productivity of all the prior infrastructures combined, including electricity, telephony and transportation," he said. He further noted that IT spending, once an expense item, now accounts for as much as 35 percent of capital spending within many organizations. That's up from just a few percentage points a few years ago, he noted.

While customers have reported productivity gains from their spending, Chambers believes many are only beginning to reap the benefits from their investments. More will do so once they deploy second- and third-generation e-commerce applications, and gain what he calls the "network effect" from their investments. That comes from investments into everything from customer support to employee services to virtual manufacturing, he noted.

Commenting on the unique nature of the current economic downturn, Chambers said he now sees a focus on customer profitability unlike at any time in his entire career in IT. The speed of change, he said, is also unprecedented in his tenure.

"Unlike the old economy and the old industrial revolution, which occurred over 100 years--things are moving at a rate we have never seen before," he said.

Long term, Chambers thinks 30 percent to 50 percent year-over-year growth is realistic. However, he said near-term visibility is so poor that he doubts Cisco will achieve that growth. There's even a possibility that Cisco will see negative growth over the short-term, he noted.

The sober assessment gives little hope to Cisco investors who are looking for any positive signal from the company. In the past year, Cisco's stock has plummeted from the mid-$70s to current levels in the low teens.

To survive in the current climate, Chambers advised partners to focus on a specialty or niche and to focus on customer satisfaction and return on investment. "If all we're doing together is providing the product and installing it, there's not going to be much margin to work with," he said. Those that focus on differentiating their businesses from other partners and from Cisco rivals will succeed, he added.

Cisco, itself, has made significant changes to its business. For the first time in its history, it has commenced a companywide layoff that could trim as many as 8,000 people from the company's payroll.

Furthermore, it has changed the way it measures success internally. This is not the first time the company has done so--it has changed the way it views the value that it adds to the marketplace seven times in 10 years--but it is significant, nonetheless, he insisted. By using new metrics, such as customer satisfaction, Cisco can get closer to key customers and allies, Chambers suggested. He added that he believes there is a 1-to-1 correlation between customer satisfaction and market share gains.

Chambers defends the company's performance, pointing out that Cisco remains ahead of the curve in many respects. Despite its fall, Cisco remains a market leader, both in terms of market share and fundamentals. The company's P/E, for example, is still an uncommonly high 38.38. The company, which posted sales of $18.93 billion last fiscal year, also has no long-term debt.

Chambers also noted that he and his lieutenants have experience dealing with market slowdowns. Chambers says his company has faced adversity before: in 1991, in 1994 and again in 1997 when conditions in Asia deteriorated.

Commenting on this year's slowdown, Chambers said the problem has spread from the United States to Asia and, most recently, to Europe. All companies in the value-added ecosystem, he said, are likely to be affected. It starts, he pointed out, with PC and systems makers, and then extends to network companies, applications developers, systems integrators and, finally, outsourcers.

One way companies can mitigate the impact of the slowdown is to choose partners wisely.

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