Chambers: Cisco Is Beating Competitors Even When They Offer "Free" Products

"We are just beating our competition," said Chambers in a conference call with analysts after Cisco posted better than expected results for its first fiscal quarter. "We are more aggressive on the competition. We are going to be tough on our competitors whether it is Juniper or HP or Huawei or Avaya."

The get tough stance comes with Cisco facing what Chambers called some "pretty aggressive measures including some companies offering networks for free to our customers and we are handling that pretty well." Chambers did not single out who was offering the free networking products, but he did say the competitor waging the fiercest price offensive is Huawei.

"You are seeing some aggressive acts,maybe even some acts of desperation by some people to try to get orders," he said. "We have seen complete offers for a network given away"

The comments came after Cisco posted net income of $1.8 billion on a 5 percent increase in sales to $11.3 billion for its first fiscal quarter ended October 29. That compares in the year ago quarter with net income of $1.9 billion on sales of $10.75 billion. Both sales and net income were above the earlier guidance provided by Cisco.

Furthermore, the results were also above Wall Street consensus of 39 cents per share on sales of $11.03 billion, according to Thomson Reuters. Cisco shares were up 47 cents or nearly 3 percent in after hours trading to $18.07.

The strong quarterly results marked a rebound for the industry bellweather which has undergone a massive restructuring with $1 billion in expense reduction slated for this fiscal year. That has included a headcount reduction of 9,140 positions from one year ago to 63,465 employees as part of a plan to streamline decision making with a new lean and mean Cisco.

Chambers said the strong quarterly results are a sign of the $40-billion company's ability to "turn quickly and move forward and not emerge weaker but much stronger." What's more, he said, Cisco is getting better at making decisions quicker.

Chambers said in the long run he sees Huawei as the company's toughest competitor. "Huawei will always compete on price," he said.

Cisco plans to battle Huawei head on in the China market, said Chambers. "You can't let them make the profits in China and then do a break even around the rest of the world," he said.

Nexy: Chambers Sounds Off On Huawei's New U.S. Channel Program Chambers also addressed publicly for the first time an aggressive new U.S. channel program launched by Huawei's enterprise networking unit last month.

"We are going to make it hard on them in the U.S.," promised Chambers. "We are going to be very tough. We do have, as you know, the number one relationship with our channel. We usually are the most profitable or very high profits with each of our channel partners. We are a channel-driven company, period, in terms of our direction."

One sign of the company's channel strength was strong sales in both the commercial and enterprise sector segments where sales were up 12 percent and 10 percent, respectively, compared with the year-ago period. Cisco also showed strong growth in the public sector, which had been a sore spot for the company, with sales growing 10 percent compared with the year ago quarter.

Chambers also pointed to improvements in the company's core switching and routing business where the company has faced stiff competition from the likes of Juniper and HP.

Although Cisco switching sales were flat for the quarter at $3.67 billion compared with the year ago quarter, the company's gross margins on switches returned to nearly the "identical level" in the same quarter a year ago. "That is well above our overall product gross margins," said Chambers."We are seeing stability in our switching portfolio from an order, market share and gross margin perspective."

One of the keys to the "gross margin" rebound is a change in sales compensation that rewards Cisco sales personnel for the first time ever on total profit contribution. "Everyone in the company is now focused on gross margins," said Chambers. "Our sales people get paid for the first time, and you can probably say we should have done it earlier, on total profit contribution."

High-end routing sales were up four percent compared with the year ago period, while mid- and low-end routing was down 16 percent, said Chambers. Next generation routing product sales were down three percent compared with the year ago quarter.

Cisco's service provider sales, however, were were up 16 percent compared with the year ago quarter. Chambers attributed the strong growth to Cisco's sharp focus on delivering business value for those service provider customers with network architecture solutions that are driving either revenue growth or cost reductions for customers. He said service provider customers "clearly understand the value" that Cisco is bringing to them.

"We are aligned one for one with the service providers," he said noting that both IBM and HP are competing with service provider customers.

Overall, Chambers said the Cisco results show that the company's "restructuring and organizational" changes are benefitting customers and shareholders. "We are in the sweet spot of what our customers are focused on whether it is on cost reductions, productivity, business transformation or revenue growth," he said.