Cisco Systems has endured its share of problems over the years, but it’s been through a particular slog lately. Among other stresses, the company, along with those in related businesses like IBM, Juniper Networks and Ericsson, has been hurt by poor sales in emerging markets, especially China, despite heavy investment there.
The dominant networking vendor saw its revenue plunge by more than $700 million and net income by $180 million in the first half of its 2014 fiscal year, which ended in January, compared to the same year-earlier period. Was it just a couple of slow quarters? Maybe not: the company recently scaled back its long-term revenue and earnings targets.
Cisco has also largely sat out the stock market’s frenzied rally. From the beginning of 2013 through the close of trading on Tuesday, the company’s stock price rose by 9.8 percent but significantly lagged the S&P 500 Index (up 30.8 percent) and Dow Jones Industrial Average (24.9 percent). While some analysts are saying the stock is now undervalued and presents a buying opportunity, Barclay’s recently downgraded Cisco’s shares from overweight to equal weight. In fact, some observers consider the stock to have been an underperformer for at least 15 years.
The company is fighting back on various fronts. For one, on Monday it announced an upcoming $1 billion of new investment in building data centers that will enable cloud computing services. Just days earlier, Cisco finance chief Frank Calderoni had visited CFO’s offices in New York City to talk about future prospects. An edited transcript of the discussion follows.
So far it seems that investors aren’t betting on Cisco’s growth prospects. Where will growth come from?
As we grow profits faster than revenues, which is the model we’ve been on, I believe we can get the right type of return from a share-price perspective.
One area we’re investing in is cloud data centers. That’s a growing business for us. The infrastructure we sell to help customers build their clouds is already over $4 billion. We also have as-a-service applications that provide ongoing cloud services. These are opportunities for us as we think about the next couple of years.
We also think we have the broadest portfolio of security products. It is top of mind with customers today to invest in their security architecture. Combining the approximately $3 billion acquisition of SourceFire we just completed with our existing products, that’s another area of growth.
Third is mobility. Everyone is getting information [from mobile devices] on a more regular basis and [looking at] how to leverage their network to expand the capabilities of their mobile investments. We’ve invested a tremendous amount in both organic growth and acquisitions on the mobility side. And then there are the services to bring all this together and provide services solutions for customers’ business needs.
What are you doing toward generating that better margin you referred to?
First of all, making sure we’re investing in these areas of growth. Also, we’re looking for ways of being much more efficient in our organization. Over a number of years we’ve been transforming the company, [starting with] a finance transformation. In the first year of the transformation we took a billion dollars out of our annual run rate, and we’ve been continuing with initiatives to be more efficient over time. And the other thing is to go after higher-margin businesses like software and services.
Where are you on that transition curve right now?
I think we’ve got some good traction. Again, we had $4 billion in cloud [infrastructure business] in the past year, and $8 billion in software. We’re talking about growth rates in the mid-teens on software, so that’s off and running and we have opportunity ahead of us. We’ve also been investing in services for a number of years. We’ve made good progress.
[Editor’s note: In the video below, Calderoni talks further about Cisco’s finance transformation, as well as allocating capital to investors and the company’s growing interest in “the Internet of Everything.”]