Cisco CEO calls for dramatic cuts and a narrowing of priorities

Dramatic expense cuts and a narrowed focus on five networking technologies, including video, are coming to Cisco Systems as part of a massive planned turnaround, 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," adding that expenses need to be cut by half.

Cisco, which controls more than 70 per cent of the global market for network routing and switching products, nonetheless faces dramatic competition from major companies such as IBM, Oracle and Hewlett-Packard as well as a host of newer, smaller players in software and ASICs (application-specific integrated circuits), Chambers said.

Chambers' 50 minutes of remarks came three days after he sent a 1,490-word memo to Cisco employees that talked about 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."

He added in the memo: "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 needed to hear. Cisco's last two quarterly results have disappointed many analysts, and Chambers repeated warnings he made in February of lowered public spending in developed nations on networking gear and competitive threats to Cisco's line of switching products.

Overall, Cisco shares have fallen by one-third in the past year, and have recently been below $20 a share, more than half as much as they were in 2001. At mid-day Thursday, Cisco stock was trading at $17.93 a share.

Chambers said the five areas of top priority at Cisco will include a "doubling down" on video technology. Cisco makes a range of videoconferencing and video streaming products and has seen benefits from a massive Tandberg acquisition , 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 40 times in the next four years, Chambers said.

The other four areas of focus include "technology and business architecture," which Chambers said customers "really understand" because large architectural shifts in technologies can improve a company's productivity by two per cent, a dramatic shift. He didn't elaborate.

The third area is retaining Cisco's leadership in core routing, switching and professional services. The fourth focus will be on Cisco's collaboration tools such as Webex and Quad , which have seen revenue growth in the high 20 per cent range. "It's a $4 billion market for us," he added.

The fifth area of focus will be data center products. "We're really putting the wood behind this" in areas that include virtualization and cloud computing, Chambers said. "We're positioned well, but boy, we're taking on giants."

Despite the strong focus on those five areas, Chambers also said Cisco is "not going to fix what's not broken ... we will take bold steps on [these] priorities and resources and cut back on a number of [other] priorities." Chambers didn't elaborate on which technologies will get reduced focus. Initiatives such as smart grid technologies and security , however, will remain "big plays" at Cisco on top of the five priorities he named, he said.

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

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