Last night was the last call — the last quarterly earnings call for Cisco CEO John Chambers. His legacy on Wall Street will be a masterful management of earnings expectations, investors, and analysts.
Chambers was always the CEO of positive spin. He was the guy who could take a disastrous financial quarter, tell it like it is, and quickly move on. Take a look at this earnings call from 2013. The ultimate knack to managing investors is to leave them thinking they should buy more stock after a terrible quarter, and Chambers did this as well as anybody.
Calming analysts and markets with his mellifluous Southern drawl, Chambers led the company through a series of growth spurts as well as crises. The biggest test was the aftermath of the 1999-2000 technology bubble, when Cisco had to unwind frothy acquisition bets, an inventory glut, and a crash in enterprise technology demand. During that period, Cisco shares fell from an all-time high of $82 in 2000 to a low of $10 in October 2002. Recently they hovered near a respectable $30.
Some of the tech bubble aftermath involved massive inventory write-offs, including a $2.5 billion write-off in 2001. This accounting maneuver became the norm in the tech industry as Cisco and Chambers marched back to profitability. Then there was the 2008 global financial crisis. Yet another crisis arrived in 2012-2013 as the Chinese fled North American technology in light of the National Security Agency spying revelations, which cratered Cisco’s Asian revenues.
People never seemed to remember these crises very long. That’s because Cisco’s brand is strong, and much credit for that is due to Chambers, who has a record of bouncing back with a smile. He always knew how to control the spin, bringing the discussion to the next big thing: Internet video, the Internet of Things, the Smart City. Cisco steadily went on to hit record net income of $11 billion on revenues of $47 billion in fiscal year 2014.
Cisco was built on the back of rapid-fire acquisitions, which consolidated its power in the mid 1990s as it bought just about any enterprise networking technology company with an Ethernet box to beat back Bay Networks, its biggest competitor at the time. It’s true, Cisco never regained the growth of its rapid rise in the 1990s, but that’s because there’s inevitably less room for a giant tech company to grow.
In recent years, Cisco’s voracious acquisition strategy hasn’t always worked out. Its $7 billion acquisition of Scientific Atlanta (a story we broke at Light Reading while I was the Editor) turned into a dud, labeled as overpriced by many investors. But despite this misstep, Cisco did well in other markets. Cisco managed to transition enterprise networking gear to data center equipment, grabbing large share in the server and data center switching market, which was probably one of the fastest growing markets of the last decade.
Chambers alluded to this on the earnings call last night, saying Cisco has played the game of large tech growth well. “I will never apologize for growth in single digits in switching,” he said.
Indeed, the law of large numbers is the biggest challenge for large technology companies, which are under constant threat of upstarts in rapidly evolving markets. This requires growing revenues by multiple billions per year to deliver high single-digit percentage growth. When compared with other tech giants such as IBM and HP, Cisco has done well. For example, IBM’s 10-year revenue growth is 5.7% and growth in EBITDA was 10.5%, while Cisco’s revenue has grown 10.9% and its EBITDA 8.5%. HP grew revenue 9% but had no earnings or cash flow growth over the last 10 years.
Then there are the details, like the fact that Chambers has personally vetted more than 70,000 Cisco employees.
As my long-time colleague Craig Matsumoto over at SDXcentral.com points out, Chambers took a victory lap yesterday, having fun with analysts and beating his chest one last time. He downplayed the new threat of white-box switching and commodity Software Defined Networking (SDN) gear.
“All this garbage about new players coming in, software coming in, and white-label producers killing our margins was just wrong,” Chambers said. “We are beating our competitors that you all were worried about.”
The “last quarter” itself was ho-hum. For the fiscal third quarter ended April 25, Cisco reported revenues of $12.1 billion and net income of $2.4 billion, or 47 cents per share. That’s a 5 percent rise over the comparable quarter last year, when Cisco reported revenues of $11.5 billion and net income of $2.2 billion, or 42 cents per share. Analysts had projected sales of $12.07 billion and profit of 53 cents, according to Bloomberg.
New Cisco CEO Chuck Robbins takes over on July 26. Robbins doesn’t just have to fill Chambers’s shoes, he’ll have to fill his entire suit. It will be interesting to see if Robbins can manage Wall Street and investor expectations with a similar optimistic panache, or if his style will take a novel turn.