Cisco chief: “We got surprised in January”

TORONTO — Just as one of its main rivals was issuing pink slips to yet another 20,000 employees, Cisco Systems president and CEO John Chambers was delivering an optimistic, almost predatory view of the networking giant’s future.

“A market transition, be it good or bad, is where you gain market share,” said Chambers, Speaking to a group of customers at Cisco Solutions Forum 2001 in Toronto Tuesday.

To drive home his theory, Chambers highlighted a graph that showed Cisco’s market capitalization from two years ago showing Nortel and Lucent towering above the San Jose- Calif.-based company. Now, he says, Cisco has pulled ahead of Nortel, Lucent and a handful of smaller competitors.

But the slowdown won’t last long, said Chambers, banking on a major change in the way CEOs view the role of information technology in their business. He said business leaders went from spending five per cent of their budget on IT three to four years ago, up to 35 per cent in recent years.

“That’s an increase of seven fold, that’s when CEOs said ‘I know IT is something we need to spend money on,’ ” said Chambers.

And as the downturn continues, he suggested, there’s also going to be rapid consolidation in the industry.

“We’re steering the ship through challenging times,” Chambers said. “There has probably never been a period of faster movement and uncertainty than in the high-tech sector this year.”

Chambers noted that while times are tough, he is bullish on the long- term prospects for technology companies in the coming months. And while admitting, “we got surprised in January” when sales began to fall off, he said the company’s was quick to react and issue a six-point plan to re-focus the business and cut $1 billion out of expenses.

“We dramatically and quickly reallocated resources,” he said. “We have to focus on the available market, not the way we wish it was. We have to focus on what we can control, such as how fast we can grow versus the market. You have to focus on the way the world is, not the way you wish it was.”

Cisco’s is now jockeying to be the No. 1 player in enterprise, commercial and service provider markets. Despite the company’s setbacks earlier in the year, analyst Albert Daoust of Toronto-based Evans Research said Cisco has clearly “decided it is going to turn around and get back at it again.”

“He’s optimistic because he has $18 billion in cash and he perceives that his opponents are cash-starved and the creditors are at the bay and he thinks he can use his money to get ugly,” said Daoust.

Chambers made claim to a 60 per cent share of market revenues in the enterprise networking space (ie LAN products), adding he hopes to gain five to six per cent per year on top of that.

“I think in terms of dominating the enterprise, that one group of customers, there’s a type of grim inevitability to what he’s saying,” said Daoust, director of special projects and networking with Evans.

Daoust predicts Cisco’s reign in the enterprise space could last up to 30 years.

“(Cisco) is financially healthy and big in the midst of a recession and that’s the time for to get predatory with the weak players,” he said.

Referring to Cisco’s strategy to also gain position in the telco market, Daoust says the time is ripe for the company to go after customers while their competitors may not be as strong, but questions whether they will have any significant wins.

“What I find interesting is they still believe that in the markets dominated by the Nortels, Alcatels and Lucents of the world they can still be in the top three over the long term. They’ve had some setbacks competing in (those companies’) core markets and have had no noticeable successes in the service provider market,” said Daoust.

He will concede however, that Cisco has “some interesting products”, in particular their router based services and IP services, basic transmission technologies and fibre optics.

Like a fighter coming back for the knock-out punch, Chambers said he is “more comfortable” now than he was six months ago, adding the current climate has challenged companies to understand their business like never before.

In the future, he said a company’s strength will be drawn from a combination of “brand, culture, talent and speed.”

In terms of Cisco’s current shopping list, Daoust dismissed any idea that Chambers may be eyeing beleaguered Nortel, saying it doesn’t fit with the company’s acquisition profile of buying small companies with a focus on intellectual property.

“They think Nortel is too large, different culture and they think its going to be a problem like everyone thinks the HP/Compaq merger is going to be difficult,” he said. “If they deviate from that it would be a major change.”

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