Q&A: Cisco CEO John Chambers

Does Cisco Systems CEO John Chambers know something about his company that continues to elude most of Wall Street?

Given the investment community's propensity for herd behaviour, Cisco may be one of the most underestimated big-name technology stocks out there. The networking giant finished last week trading near its 52-week low, even though it continues to rack up record sales and earnings.

But after living through the go-go days of the bubble and the desperation of the post dot-com recession, Chambers remains convinced about the best way to manage the company through good and bad.

Taking his managerial cue from former General Electric CEO Jack Welch, Chambers, who took over as chief executive in 1995, has been at the helm as Cisco's annual revenue has soared from $1.2bn to its current run rate of close to $24bn.

Chambers recently sat down with reporters and editors from silicon.com's sister site CNET to talk about his management philosophy as well as his plans for steering Cisco through the latest round of consolidation in the technology industry.

Q: Cisco keeps talking about being a growth company, but shareholders haven't been as impressed. The company hasn't grown the way they would have hoped. How do you address those concerns?
A: It's hard to grow faster than your segment of the industry. Yet, year in and year out, we've grown faster than our segment of the industry in each category.

We've been growing pretty consistently in terms of our orders, and we think we will grow at 10 per cent to 15 per cent. Our order rate has been in that range for the last six quarters in a row.

But Cisco isn't that little scrappy start-up anymore, is it?
No. But if you look at it mathematically, we have six advanced technologies, which we've gone into, where we lead. To the best of my knowledge, there has never been a major IT company that is the leader in more than one or two product areas. Each time we move into the market, we become the number one player, almost without exception. That has never been done before.

If we were a start-up with those types of growth numbers, with three of these groups approaching the billion-dollar-a-year run rate, the stock would be a different value. So that's pretty good.

Why do you think Wall Street is not getting the message?
I think Wall Street always gets the message. The issue is, at the present time, there are a lot of people looking at what the most recent quarter might be. But we don't run our business on a quarter-by-quarter or month-by-month basis. We run it for the long term.

Time will tell if our growth rate is in the high single digits, where the market clearly has us, or if it's in the 10 per cent to 15 per cent range – or potentially, even slightly above that.

Will stock-option reporting affect Cisco?
No one really knows... We deal with the world the way it is. We'll adjust either way, and we'll adjust based on what the shareholders say. I think what you're seeing now is just a period of uncertainty about growth rates and then a period of uncertainty about the economy overall.

What do you see happening in the second half of this year in terms of IT spending?
I can tell you what our customers say. Our customers say that 80 per cent to 90 per cent of their businesses will see increased earnings this year versus last year. Of that, about 60 per cent of the total, I believe, says capital spending will increase, but only about a third will hire.

People are talking about the Federal Reserve raising interest rates, and oil prices have been going through the roof. Are companies going to hold back on spending in the second half of the year?
Everybody wants a single silver bullet: "If this occurs, will that occur?" As we all know, the economy probably has five or six major bullets going on at the same time, or variables in the equation, if you will. So I think there are a number of variables in the equation that can have a positive effect on the market, and there are a number of variables in the equation that can have a negative effect. It really comes down to what are their earnings per share. When that tends to go up, they can spend more.

What's your current thinking on paying out a dividend?
If you ask shareholders what they want us to do, a growth company with this type of [price-earnings] ratio, I'd say 90 per cent of them want us to use our money to either acquire our stock back, or to use it to invest in companies or to acquire other companies.

So, at some point in time will we pay a dividend? As we have said many times before, yes.

Not this year?
No. Most companies that are growth companies pay nominal dividends or not at all. If the market would have a changed perception on that and want us to pay a dividend, then we'd pay that. (Continued on the next page...)