Riding on Cloud 9, Cisco paves way to the top

We made a big bet on that a decade ago, and upon that, are our top five priorities as a company. If we are right on that, that translates through the market share and more value to your customers. In the last quarter, we grew about 11% and Juniper grew down dramatically, as did an HP.

Analyst projection for this next quarter has Juniper down in double digits, has HP down in mid-single digits, and has Cisco at the 5-7% type of number. There will always be competition. But it looks like the elements of our strategy are the right ones. There are a lot of areas to improve on. I don’t want to say, by any means, we have got it. But the major investments empowered decisions did appear to be playing out very well.

Jayashankar: You have come off a really tough year. You had sent a memo in April 2011 where you talked about how you had slipped on execution and discipline and you are talking about all these large trends taking place now. Is the company back on track and have you been able to fix that issue?

Chambers: If you look at where we are now, we are gaining share at a very rapid rate versus Juniper. That was a company that many people thought was out and a very rapid rate versus HP. But again, gaining share in the markets that Senthil talked about, we grew at 90% in the data centre and the market that’s growing in the mid teens, entered a server a market combined with networking the most people thought we couldn’t even win. Here, we are growing a 20% a market share in North America, 10% globally. We are executing pretty well.

Having said that, there are many areas that we need to improve on. You never want to miss a crisis and be realistic on what you have to change. So we are more focused in terms of our five foundation priorities, growing revenues faster than profits and about what we are doing in emerging markets around the world. You have got to be very focussed on where you go, but right now, it feels good in terms of what we can control and influence and our strategy appears to be playing out well.

Jayashankar: One set of competition you don’t mention is the Chinese companies. We have heard in India that that they have grabbed a lot of market share because they were very aggressively priced. News reports say that they are making a big portion in the US as well especially Huawei. You talked about a very large market share in a market that’s also maturing. Doesn’t that make you more vulnerable?

Chambers: I have to think about the causing effect. We always have good competitors. If you are in good growth markets, by definition, you will attract good competition. Players like Huawei will be a good competitor in the future; they compete on price, we compete on architecture. We compete on value addition, customer trust and the ability to really get trusted both by governments and businesses and our ability to do what we said in an open fashion.

There will always be peers around the world and it sometimes rotates on who our toughest competitors were a year ago. You will probably agree, we have done very well versus them. Our competitors five years ago were very small compared to where they were and our competitors of 10 years ago are largely gone. Now the same thing can happen in Cisco if we don’t do transition – that’s what I think a lot of people forget.

Our market is of high-tech moves with tremendous speeds and it’s very rare that the company who leads in one decade is a major player one or two decades later. Max Labs was able to gain market share and increase switch at the present time. We are in routing, switching, wireless and video.

Chengalvarayan: You said this is not as bad as 2001. Why is that this is not as bad as 2001 because this is the time when we have seen some customers of yours disappear. I am talking about big financial giants. How was 2001 worse than the current stage we are going through?

Chambers: 2001 was a real challenge for the whole high tech industry. Again, Cisco saw the downturn two to four quarters ahead of our peers because much of our business is new every quarter. I used to say I am not sure if that’s good or bad, but it’s bad. But we saw it then. We said it was a 100-year flood, we adjusted properly and we came out with tremendous momentum.

But 25% of our customers disappeared forever and the cutbacks were dramatic. For any high tech company, it was about survival or didn’t understand how tough that was. This last one was an example of the largest recession we have seen during our lifetime, but also one that we came through relatively well.

We were surprised when it first occurred, very quickly learned what we had to do differently, got our expenses in line, instruction ourselves for the future. By the way, most of our peers haven’t even done that yet and that’s part of the reason you see us being successful now as where we are going.

Chengalvarayan: Where are these tough spots? Where do you see them? Because 5-7% guidance that you gave for the coming quarter and the next are not as robust as people would have wanted, which is normally 7-8%.

Chambers: First, our long-term guidance for the company is actually 5-7%. I have seen a number of tough areas; which we all understand what’s going on in Europe especially Southern Europe. We should understand what we said a year ago. Government spending is going to be very tough especially in the US and it would go from state and local to Federal. We anticipated the financial challenges and we actually saw that again almost two to three quarters ahead of our peers in 2007. You have seen the financial institutions at the present time as you would expect over this year go with very conservative budgets. So I don’t think there is any surprises now within that but our peers are for the first time saying, Cisco was right.

Chengalvarayan: So what are these possible tough spots that you really have little control over? Are you worried about spots that you have control over? The transitions that you make into cloud, because it’s done if you do, it’s done if you don’t when you focus away or when you take focus away from your core business of routers and switches you are set to be losing focus and to stick with it.

Jayashankar: If I can just add to that question. You have got to play both kinds of strategies – a defending strategy and an attacking one. How do you switch between the two constantly?

Chambers: What we play is a strategy based on market transitions. In our industry, you want to learn from the mistakes that you made in the past and your successor and position yourself for the future. So it isn’t about individual products and that’s hard to explain to your audience. It’s about how smart networks made up for routing and switching. It has the cloud, the storage capability, the processor capability and the video. It has the collaboration, which architecturally allows our customers to move faster with us to achieve their business goals.

The grid group within China clearly understands on utilities. Players like Reliance here clearly get it as well as the government leaders. So the way you play offence as well as defend is you tie these together with the best in class products in each category, which most people would say we are pretty close to and you enable them to achieve their business transitions. So what Cisco now is focussed on is how we help governments achieve their goals in terms of education, job creation and healthcare.

How do you help companies research about their space, grow their revenues and grow their profits in a market that is really tough for them? In research market space, we grew at 12% last quarter when our peer Juniper shrunk at 20%. So the architectural approach is winning and there is always importance to get it down to far key fundamental areas we focused on. So actually, I think we are doing a pretty good job. At the end, the important message is not focusing on 25 priorities but really bringing it down to our top five foundational focus points. If you watch that’s what we do at acquisitions as well as our internal developments.