Cisco's Chambers Glows at N+I

LAS VEGAS -- Networld+Interop -- Cisco Systems Inc. (Nasdaq: CSCO) CEO John Chambers, speaking here today to a packed ballroom in the Las Vegas Hilton at the Networld+Interop tradeshow, was the life of the party after his company's earnings fueled a poweful rally in technology stocks.

Cisco announced better-than-expected third quarter 2002 earnings last night, which helped spark an 8 percent rise in the Nasdaq Composite Index today (see Cisco Tops Expectations). Cisco’s stock closed up $3.19 (24.39%) to $16.27 today. The good news buoyed the entire sector, with Cisco's competitors all seeing gains as well. Extreme Networks Inc. (Nasdaq: EXTR) closed up 2.23 (30.01%) to 9.66; Foundry Networks Inc. (Nasdaq: FDRY) was up 0.77 (15.84%) to 5.63; and core routing rival Juniper Networks Inc. (Nasdaq: JNPR) closed up 1.19 (14.12%) to 9.12, just one day after hitting an all-time low (see What's Eating Juniper's Stock?).

“It’s nice to see so much green for a change,” Chambers joked with the audience as the CNBC tickers raced across the bottom of the flat-screen TV used in the company’s product demonstration during his talk. “It’s a real pretty sight.”

During his hour-long talk and the question-and-answer period that followed for press, Chambers emphasized growth in productivity and business resiliency as two key factors that will help pull companies out of the economic slowdown. While he stopped short of calling a bottom to the downturn, he used Cisco as an example to show how the use of Internet-enabled services can help companies improve their bottom lines. He said that by continuing to improve corporate efficiency, companies will recover more quickly and spur recovery throughout the economy.

Since its early days, Cisco has practiced what it preached in terms of using Internet and e-commerce applications to reduce costs and improve productivity. Chambers said that the company saves about $1.7 billion per year by virtualizing many functions such as manufacturing, employee training, and customer supply-chain operations.

He acknowledged that Cisco’s unexpected performance this past quarter was due in large part to its cost reductions and improved productivity. Analysts following the company agree. Mark Sue of Frost Securities Inc. issued a research note this morning in which he points out that despite flat growth in third-quarter revenues, Cisco was still able to post pro forma earnings of $0.11, beating consensus estimates of about $0.09.

“Execution continues to be Cisco's key strength during an environment of moderated near-term growth,” he wrote.

Chambers also talked about economic recovery on a macro-level. He said he expects the U.S. to lead the world in recovery, with the U.K. and Germany likely to follow. He sees small and medium-sized business as most likely the first to recover, with the enterprise and the service-provider markets following.

“We are in a ‘show me’ type of economy right now,” he said. “Most CEOs I talk to continue to be very cautious. They aren’t going to start spending until they see revenues and profits pick up. And even then they are going to wait two to three to six months before they really start spending.

“What history has taught us, is that recovery is slow. This isn’t a recession we’ve been experiencing. For the tech sector it has been a major depression.”

But Chambers emphasized that the light at the end of the tunnel is coming. Again using his own company as an example, he said that the benefits of improved efficiency are realized three years into implementation. Once applications are installed and processes are set into place, companies can reap the benefits more cost effectively. And when companies start to see revenues and profits growing, they will once again start buying gear to upgrade their own networks and will also look to new service offerings from their service providers.

He emphasized that companies need to get themselves ready for recovery now, so that when the economy picks up they can gain market share over their competitors. He also said that because Cisco has already improved its operations, it is in a better position to seek out new markets.

“We can go out and invest in other areas like the service provider market,” he told a group of reporters after the session. “And we’ll have an advantage, because many of our competitors are just trying to survive right now.”

— Marguerite Reardon, Senior Editor, Light Reading
http://www.lightreading.com