Cisco's Chambers Ditches Sales Target Amid Strategy Retrenchment

May 12, 2011, 12:34 AM EDT By Joseph Galante

May 12 (Bloomberg) -- Cisco Systems Inc. Chief Executive Officer John Chambers abandoned a four-year-old forecast for annual sales growth of 12 percent to 17 percent as weak demand and price pressure force him to cut jobs and exit businesses.

Revenue at San Jose, California-based Cisco, the largest maker of networking equipment, will grow no more than 2 percent in the current quarter, the company said yesterday on a conference call. Analysts on average expected 7 percent sales growth, according to a Bloomberg survey.

Chambers addressed investors on a conference call for the first time since beginning a retrenchment that has included scrapping the Flip video-camera unit, firing 550 people and overhauling a management structure that slowed decision making. Chambers said he’ll eliminate more jobs this year and cut low- margin businesses. While applauding his candor, analysts said they were left in the dark about the company’s growth prospects.

“It’s great that they acknowledged the elephant in the room,” said Joanna Makris, an analyst at Mizuho Securities USA Inc. “We all knew 12 to 17 percent wasn’t valid. But what is it -- 8 percent, 10 percent? It’s hard for us to know until they tell us which product lines they’re going to exit.”

Following the forecast, Cisco’s shares erased earlier gains in after-hours trading. Cisco fell as low as $17.12, a decline of 3.7 percent, in extended trading after closing at $17.78 on the Nasdaq Stock Market.

Technology Bellwether

In the fiscal fourth quarter, which ends in July, profit excluding some costs will be 37 cents to 39 cents a share, and sales will be $10.8 billion to $11.1 billion, Cisco said. Analysts on average had predicted profit of 41 cents and sales of $11.6 billion.

Investors view Cisco as a bellwether for the technology industry because it dominates the market for routers and switches, which direct Internet traffic. Companies buy its switches for corporate networks, while phone and Web-service providers typically purchase Cisco’s more-expensive routers.

As part of a management restructuring announced this month, Cisco began taking apart a bureaucracy that investors and former employees said slowed decisions, fueled market-share losses and led to an exodus of senior executives. Cisco said it reduced the number of councils, which were responsible for management, to three from nine, and the number of boards that reported to them to 15 from 42.

It also said it would eliminate $1 billion in costs in the next fiscal year, aiming to improve profitability.

‘Completely Committed’

“We do not underestimate the transition in front of us,” Chambers said yesterday on the call. “We are completely committed as a leadership team to make the required fundamental changes to our operating model.”

Still, the changes have yet to reassure investors that Cisco is back on track, said Bill Kreher, an analyst at Edward Jones & Co.

“It appears that this turnaround may take a little bit longer than previously expected,” Kreher said in an interview on Bloomberg Television with Pimm Fox.

Cisco’s shares have declined 32 percent in the past year, compared with a 16 percent gain in the Standard & Poor’s 500 Index. The company struggled to maintain historic levels of profitability amid an expansion into more than 30 side businesses such as smart grids, home networking and digital music hosting.

Rivals Move In

The broadened ambitions let rivals such as Hewlett-Packard Co., Huawei Technologies Co. and Juniper Networks Inc. encroach on key markets. In ethernet switches, Cisco’s share dropped to 67 percent last year from 69 percent in 2006, according to IDC, a market-research firm in Framingham, Massachusetts. In routers, Cisco’s share dropped to 55 percent last year from 66 percent.

“Cisco took advantage of some utopian conditions in the last decade,” said Mark Fabbi, an analyst at Gartner Inc. Now, “companies are getting smart and forcing Cisco to earn their business again.”

Chambers first said in August 2007 that revenue would rise 12 percent to 17 percent a year amid rising demand for Cisco’s products. He said yesterday that the forecast is “off the table.”

--With assistance from Carol Massar and Matt Miller in New York. Editors: Jillian Ward, Nick Turner

To contact the reporter on this story: Joseph Galante in San Francisco at jgalante3@bloomberg.net

To contact the editor responsible for this story: Tom Giles at tgiles5@bloomberg.net

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