Cisco's Volpi: Back to Basics
Volpi’s words of wisdom come at a time when Cisco wowed Wall Street with earnings that were actually down 78 percent from a year ago. But when compared to the previous quarter, the company grew sales 3 percent and beat earnings consensus by 2 cents -- a modest change by 2000 standards, but a good showing for 2001.
In his speech Volpi emphasized changes in the way companies develop their businesses and products. No longer can companies bet on every buzz-word technology that comes along, and no longer can they afford to ignore profitability in the name of investing in innovation. Companies must return to basics, he admonished.
“Focus is key to our industry now,” he said. “Companies can’t bet on everything like VCs hoping that some of their picks will generate enough revenue to sustain them. They don’t have the resources for that anymore. It’s time to separate the technology winners from the losers.”
This means that companies will have to sacrifice development of some technology groups in favor of deepening spending in areas that have more potential to generate value for shareholders, he said. For Cisco, this means focusing on three technologies: Ethernet/Sonet convergence, metro optical, and wireless Internet technology. Volpi emphasized that Cisco would continue to exercise restraint and thorough due diligence in selecting technologies for investment.
While he did not mention competitors by name, it was hard not to think of two of Cisco’s largest, which have fallen victim to haphazard investment strategies: Lucent Technologies Inc. (NYSE: LU) and Nortel Networks Corp. (NYSE/Toronto: NT).
Volpi's remarks struck a chord with Ron Sege, CEO of Ellacoya Networks Inc., an IP services startup. “A lot of companies took the approach of throwing a bunch of technologies at the wall and seeing what sticks,” he said. “In good times that works, but in bad times it exposes you to risks. That’s what brought down Lucent.” Cisco was a little smarter, he added, showed a bit more restraint, and seems to have come out better than some of its bigger rivals.
Volpi emphasized the importance of profitability. Gone are the days when venture capitalists and other investors punished companies for making a profit. The thought back in the late 1990s and into 2000 was that profits should be kept to a minimum so that money could be reinvested in future development. Not a bad idea when the market bubble was at its fullest, but Volpi says it's now time to concentrate on making money.
“Profitability is key,” he said. “It needs to be baked into every business plan from the beginning, because it isn’t easy to get there later on. That requires placing bets early on the right markets and right opportunities.”
He was also sure to point out that not everyone will emerge winners in this new world we live in. To the contrary, he warned that the industry still has to weed out some weaker players before it can grow strong again.
“We need to realize that it is a different reality out there today,” he said. “Assumptions about available capital and the number of players that a given market can support have changed.”
— Marguerite Reardon, Senior Editor, Light Reading