Chambers Thumps Wireless Tub

NEW YORK -- When Cisco CEO John Chambers speaks, people listen.

Cisco Systems Inc. (Nasdaq: CSCO) stock jumped $0.68 (5.59%) to $12.84 this morning, after Chambers spoke at the UBS Warburg Telecom conference here today. The bump in Cisco stock also helped buoy the general market, with the Nasdaq Composite trading up 35 points (2.6%) to 1,354 at midday.

Chambers, who normally draws a sizeable crowd wherever he speaks, packed the house with around 500 investors and analysts this morning. For the most part, he reiterated what he had talked about on last week’s first fiscal quarter conference call (see Cisco Beats by a Penny). But he also mentioned the growing importance of wireless in Cisco's service provider product portfolio.

Chambers said the company will focus on several technology areas to boost its presence in the service provider market. The company now generates roughly 20 percent of its business from service providers but would like to see this proportion grow to 40 percent or 50 percent over the next five years. The main focus is still on fixed networks, with core switching and routing certain to be areas of growth for service providers, particularly when it comes to helping carriers migrate from Asynchronous Transfer Mode (ATM) to Multiprotocol Label Switching (MPLS) infrastructures.

But another another important area of growth is wireless networking, said Chambers. Traditionally, Cisco has focused on enterprise wireless equipment, developing products using the 802.11 standard. Chambers sees this technology making its way into the service provider network, as well, and hopes Cisco will be the vendor of choice for creating service provider "hotspots." In order to achieve this goal, he said, the company would rather partner with mobile and wireless providers instead of building the technology itself.

“That’s not surprising,” says Nikos Theodosopoulos, an analyst with UBS Warburg. “We’ve already said that they need to leverage wireless in the service provider side, and the best way for them to do that is to partner.”

In a recent report published by Theodosopoulos, he mentions Lucent Technologies Inc. (NYSE: LU) as a potential partner for Cisco in the wireless space. "[Lucent is] trying to get rid of [its] wireless, so it would be a good fit for them both.”

Chambers also gave investors a few positive tidbits to take away from the discussion.

First, he said that backlog at the company is now above the $1.4 billion mark it reported on Sept. 9. This figure had fallen from $2 billion during the same period a year ago. As a result, some analysts worried that sales could be weakening.

Backlog includes products that are to be shipped within 90 days and is often seen as a key indicator for demand. But Chambers warned the audience that this is just a snapshot view and that this figure can change throughout the quarter.

Chambers touted Cisco’s improving gross margins, which he attributed to the company’s "fanatical" approach to improving things. He also said Cisco will not cut prices to compete with smaller competitors.

“For our customers, price isn’t the number one, two, or three factor. Also, once you lower prices, it’s hard to come back up. Over time, we’ll be creative about spending to keep our costs down, so that we can cut prices but still maintain our margins.”

Cisco’s gross margin rose to 69.3 percent, up from 54 percent during the year-ago quarter, according to last week’s earnings report.

Chambers insisted there are no discussions or plans to reduce headcount. Analysts and other industry observers had speculated during the last quarter as to whether Cisco would need to make drastic reductions, as competitors Lucent and Nortel Networks Corp. (NYSE/Toronto: NT) have done. The company's last census report was 35,278 employees.

As for the future, Chambers retains his conservative outlook on the market, despite the reported rise in backlog. He said that CIOs and CEOs across all industries are still being very cautious about their spending. On the service provider side, he expects capital spending to continue to get worse before it gets better.

— Marguerite Reardon, Senior Editor, Light Reading
www.lightreading.com Movers and shakers from more than 100 companies – including Cisco Systems – will be speaking at Lightspeed Europe. Check it out at Lightspeed Europe 02.

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