Cisco chief admits "flaws" in memo to staff

NEW YORK Wed Apr 6, 2011 3:24am IST

Cisco CEO John T. Chambers speaks during a session at the World Economic Forum (WEF) in Davos January 28, 2011. REUTERS/Christian Hartmann/Files

Cisco CEO John T. Chambers speaks during a session at the World Economic Forum (WEF) in Davos January 28, 2011.

Credit: Reuters/Christian Hartmann/Files

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NEW YORK (Reuters) - Cisco Systems Inc chief John Chambers, in a remarkably candid memo to employees, admitted the one-time technology bellwether and Wall Street darling has lost its way and will need to change to restore its credibility.

Chambers, one of Silicon Valley's most respected corporate chieftains, confessed in an internal email that the networking giant had been slow to make decisions, fallen down on execution and lacked discipline in an aggressive expansion.

In a 1,490-word e-mail on Monday, he warned staff to to prepare for a number of unspecified changes in the next few weeks and coming fiscal year, starting in August.

The long-serving CEO, who has apologized repeatedly to shareholders for missing Wall Street's targets, confessed his company let investors down and confused its own employees.

"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."

Cisco's last two quarterly results have disappointed the market. In November, the company announced sales growth would be lower than analysts expected. In February, it warned of dwindling public spending and weaker margins from tough competition.

The shares have lost a third of their value over the past 52 weeks. Including that slide, Cisco has lost slightly more than half its value since the start of 2001, when it was almost worth $40 a share.

"Bottom line, we have lost some of the credibility that is foundational to Cisco's success - and we must earn it back," he wrote. "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 Tuesday trading, Cisco shares gained about 1 percent, or 16 cents, to close at $17.22, galvanized by a rebalancing of the Nasdaq 100 that lent a higher weighting to the its stock.

For a text of the letter link.reuters.com/buj88r

For a Reuters Insider segment bit.ly/eVDnxY

PROGNOSTICATIONS FLAWED

Chambers called on the company to focus on five areas: routing, switching and services; collaboration; data center virtualization; architectures; and video.

In past quarters, analysts have begun urging the company to focus on doing what it does best -- serving enterprises with networking data center products -- and warned investors not to count Cisco out just yet.

"The fact is that management is recognizing issues and they've made some steps forward," said Grady Burkett, an analyst at Morningstar who has a "strong buy" rating on the stock. "This company is recognizing where it's at, its size and what its future growth prospects look like.

"It's okay to dominate a market and generate high returns in a core business and return some of that to shareholders. You've got a situation where investors can do well with the stock.

Chambers has run Cisco since January 1995 and is considered one of Silicon Valley's foremost prognosticators, whose views on industry trends are invariably taken seriously. He was one of the first to warn of the impact of the financial crisis on the sector in late 2007.

In his memo however, he confessed that the sprawling San Jose-based networking giant with nearly 73,000 employees had been sideswiped somewhat of late.

In past years, with the likes of Hewlett Packard increasingly coming to the fore or reworking themselves into one-stop hardware-software outfits, the company has seen its dominance in networking come under attack.

Heightened competition has pressured profitability. Gross margins slipped to 62.4 percent in the fiscal second quarter from 64.3 percent, and the company's third-quarter earnings-per-share outlook fell short of average projections.

Cisco has also expanded in past years away from its traditional strengths in routers and switches, and into areas such as set-top boxes and consumer devices -- moves some analysts said had detracted from its core business. Sales in both areas fell in the last quarter.

"Our growth strategy has been based on capturing the incredible opportunity afforded by this massive demand for the network. Many say that in the face of this expansion, Cisco needs more discipline. I agree."

Some analysts suggested Cisco might be wise to concede some of its less-fruitful consumer-focused endeavors, which include its foray into home teleconferencing with "Umi."

"They should get out of the consumer market. It doesn't make a lot of sense to us and there isn't any benefit to the company to be in that space," Burkett said. "Anything that touches consumer in our view is something they could sell-off or divest and redirect their focus back to the enterprise."

To appease investors frustrated by decelerating growth, the company declared its first-ever dividend of 6 cents a share last month, which gave its sputtering stock price a brief jolt.

Some analysts said Cisco began to slip during the industry downturn of the past two years.

"Customers were hesitant to change or to purchase and therefore Cisco, instead of focusing on newer products in their core business of switching and routing, were looking at other areas," said Evercore Partners analyst Alkesh Shah.

"Investors are staying on the sidelines with Cisco. People don't know, is this a growth story still, or will they continue to lose market share?"

(Additional reporting by Tiffany Wu, Yinka Adegoke and Paul Thomasch in New York; writing by Edwin Chan; editing by Ted Kerr and Andre Grenon)

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