Already a Bloomberg.com user?
Sign in with the same account.
If ever a corporate rocket needed a boost, it is Cisco Systems Inc. (CSCO
) In a conference call on May 8, the company reported its first year-over-year sales drop since it went public in 1990. Even after a massive $2.2 billion write-down of excess parts, swollen inventory at the networking-gear maker grew 60%. It has fired thousands of workers, the first layoffs in its 17-year history. As many of its New Economy customers--dot-coms, Web hosters, and upstart content providers--go belly-up, they're taking large chunks of Cisco's business and most of its growth with them. Instead of the 50% to 60% annual sales and profit growth that CEO John T. Chambers predicted as late as December, 2000, Cisco will post growth of less than 20% for its fiscal year ending in July.
To hear Chambers tell it in the conference call, a turnaround plan is already in place. Chambers reiterated to skeptical analysts that Cisco will return to its historic growth rate of 30 percent to 50 percent over the next 3 to 5 years. To get there, Cisco will exit laggard businesses and focus its investment in areas with the potential for highest growth, such as broadband equipment and Internet-based phone systems. Management will also cut $1 billion in costs this year on top of the layoff of 18 percent of its workforce. While it will still acquire upstarts, it will buy fewer companies and only later in their product life cycle. "We're in a stronger position relative to our peers than we were six months ago," Chambers told BusinessWeek.EXPERIENCE NEEDED. Perhaps. Yet Chambers' plan relies on three assumptions that were once taken for granted but are now shaky at best: that Cisco can execute its restructuring, that its markets will rebound to historic growth levels, and that Cisco will get more than its fair share when they do.
Start with the restructuring. Cisco's management may lack the experience needed for such a task. With Chambers spread thin--he spends half his time with customers and travels three days a week--he'll need help. Yet Cisco has no chief operating officer, and only a few Cisco managers, not to mention other workers, have turnaround experience.
Chambers is counting on his decentralized management style to help the plan succeed. But that philosophy served Cisco poorly during the last six months. The company was doubling its inventory, hiring workers, and acquiring companies at a record clip just before the biggest falloff in demand Cisco has ever experienced. Now, Chambers is asking these same employees--most of whom have watched their options sink underwater in the past 12 months--to work harder to turn the company around.
Even if Cisco's internal changes go smoothly, its markets aren't likely to accommodate his vision. Customers, such as WinStar Communications (WCII
) and NorthPoint Communications Group Inc. (NPNT
), that contributed 20% of Cisco's revenues in the second half of 2000 are disappearing through bankruptcy. And according to the company itself, its dot-com business could fall to less than 2%, whereas it was expected to double, to near 10% of its total. Cisco insists it will find new customers, but analysts are skeptical. "Cisco is in denial about how it will replace this business," says Scott C. Cleland of research provider Precursor Group.
Moreover, with upstart rivals vanishing, the large corporations that make up 65% of Cisco's business are feeling less pressure to update their networks. Meanwhile, big phone companies are expected to spend 8% less on equipment this year, according to Lehman Bros. Wall Street analysts now peg annual growth of the corporate networking market at 10% to 15%. "They'd have to hit the cover off the ball in the service-provider market just to get to 20% to 30% overall growth," says Martin Pyykkonen, an analyst at C.E. Unterberg, Towbin.DWARFED. And there's no guarantee that Cisco will get the lion's share of growth. It faces fierce competition in its fastest-growing and most profitable markets. Last year, in high-end Net routers, Juniper Networks Inc. (JNPR
) doubled its share of the market, to 34%--while Cisco's share fell from 78% to 65%. And even though Cisco sold more than $1 billion worth of optical products last year, those sales, and its product line, are dwarfed by rival Nortel Networks Corp. (NT
) Ciena Corp. (CIEN
) has also beaten Cisco to several fast-growing niches of the optical market. To catch up, Cisco could acquire companies. Yet with its stock severely depressed, that's less likely.
It's clear that Chambers intends to manage Cisco with a strategy similar to what he has used since becoming CEO in 1995. He says investors expect him to take risks, and he will continue to do so. "If a plane gets into trouble, pilots are taught that you have to get aggressive as soon as possible," says Chambers. That may be true, but no amount of risk-taking may be able to save Cisco from some low-altitude flying. By John Shinal in San Jose, Calif.