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Cisco CEO calls for dramatic cuts and a narrowing of priorities

Comments to analysts follow candid email sent to workers this week

April 7, 2011 01:35 PM ET

Computerworld - Cisco Systems plans to make dramatic spending cuts and adopt a narrowed focus on five networking technologies, including video, as part of a massive turnaround effort, Cisco CEO John Chambers told financial analysts Thursday.

"We are going to make tough decisions on where we don't spend," Chambers told analysts at a Wells Fargo conference that was webcast live. "We have to bring expenses down dramatically," he said, adding that expenses need to be cut by half.

Cisco controls more than 70% of the global market for network routing and switching products, but it nonetheless faces strong competition from big companies like IBM, Oracle and Hewlett-Packard, plus a host of newer, smaller players in the software and ASICs (application-specific integrated circuits) businesses, Chambers said.

Chambers' 50 minutes of remarks came three days after he sent Cisco employees a 1,490-word memo that discussed the needed changes in unusually direct language. "We have been slow to make decisions, we have had surprises where we should not, and we have lost the accountability that has been a hallmark of our ability to execute consistently for our customers and our shareholders," Chambers wrote. "That is unacceptable. And it is exactly what we will attack."

In the memo, he went on to say: "Bottom line, we have lost some of the credibility that is foundational to Cisco's success and we must earn it back. Our market is in transition and our company is in transition. And the time is right to define this transition for ourselves and our industry."

In a question-and-answer session at the Thursday conference, Chambers said the memo was the kind that a "family" organization needs to hear. Cisco's financial results in the last two quarters have disappointed many analysts, and Chambers repeated warnings he made in February regarding decreases in spending on networking gear by governments in developed nations and competitive threats to Cisco's line of switching products.

Overall, Cisco's stock price has fallen by one-third in the past year, and it recently dipped below $20 per share -- less than half of what it was in 2001. At midday Thursday, Cisco's stock was trading at $17.93 per share.

Chambers said Cisco's sharpened focus on five high-priority technologies will include a "doubling down" on video technology. Cisco makes a range of videoconferencing and video streaming products and has seen benefits from its massive acquisition of Norwegian videoconferencing vendor Tandberg, he noted.

"We're not perfect, but boy are we tough to beat," Chambers said in describing the focus on the five areas. Video technology spending is expected to grow by a factor of 40 in the next four years, Chambers said.

The second area of focus is "technology and business architecture," said Chambers, noting that customers "really understand" the importance of those kinds of offerings because big shifts in IT architectures can improve a company's productivity by 2%, a dramatic upturn. He didn't elaborate.

Third, Cisco will make it a priority to retain its leadership position in the core routing, switching and professional services markets. Its fourth area of focus will be collaboration tools, such as Webex and Quad, which have seen revenue growth in the high 20% range. "It's a $4 billion market for us," Chambers added.

Fifth on Chambers' list are data center products. "We're really putting the wood behind this," he said, noting that the company's data center priorities will include virtualization and cloud computing. "We're positioned well, but boy, we're taking on giants," he added.

Despite focusing heavily on those five areas, Cisco is "not going to fix what's not broken," Chambers said. "We will take bold steps on [these] priorities and resources and cut back on a number of [other] priorities." He didn't elaborate on which technologies will get less attention. However, he did say that initiatives involving technologies such as smart grid systems and security will remain "big plays" at Cisco in addition to the five priorities he named, he said.

Chambers wasn't very specific about the way cuts might affect Cisco workers and customers. "We will handle those with class," he said.

Matt Hamblen covers mobile and wireless, smartphones and other handhelds, and wireless networking for Computerworld. Follow Matt on Twitter at Twitter @matthamblen, or subscribe to Hamblen RSSMatt's RSS feed. His e-mail address is mhamblen@computerworld.com.

Read more about Networking in Computerworld's Networking Topic Center.



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