Cisco CEO Chambers Plans Changes to Fix Lost Credibility

Cisco Systems Inc. (CSCO) Chief Executive Officer John Chambers, after reporting disappointing earnings four quarters in a row, will makes changes aimed at regaining the company’s lost credibility and sharpening its focus.

“You will see Cisco make a number of targeted moves in the coming weeks,” Chambers said yesterday in a memo to employees at the San Jose, California-based company. He didn’t give details on what form the changes would take.

In the 1,500-word message, Chambers depicted a company that has lost focus and been slow to make decisions. Cisco has seen profitability erode and is struggling to meet sales growth goals while pushing into 30 new businesses. Tackling additional markets also has left Cisco vulnerable to rivals such as Hewlett-Packard Co. (HPQ) and Juniper Networks Inc. (JNPR), which are moving into its home turf.

“The acknowledgment that Cisco is having a few setbacks suggests that change is probably a good thing,” said Brent Bracelin, an analyst at Pacific Crest Securities in Portland, Oregon. He has an “outperform” rating on the shares. “It internally signals the head of the company is very focused on addressing some of the issues that have resulted in where the stock is at today.”

Disappointed, Confused

To help streamline the company, Chambers elevated Gary Moore to chief operating officer in February, creating a new position. Cisco has shed the “accountability that has been a hallmark of our ability to execute consistently” for customers and investors, Chambers said in the memo. Cisco will embark on a series of changes aimed at revamping leadership and making it easier for customers and partners to work with Cisco, he said.

“We have disappointed our investors and we have confused our employees,” Chambers, 61, said 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.”

The changes may include selling or spinning off Cisco’s consumer business, Ehud Gelblum, an analyst at Morgan Stanley in New York, said in a report. That unit includes Pure Digital Technologies Inc., the maker of the Flip video camera.

The company also might move more marketing dollars and employees to its main routing, switching, data-center video and collaboration business, while decreasing the focus on side businesses, he said.

Overall Strategy

Chambers said Cisco’s fundamental strategy remains sound. “It is aspects of our operational execution that are not,” he said.

Investors view Cisco as a bellwether for the technology industry because it dominates the market for equipment that directs Internet traffic.

Shareholders have grown impatient with the company’s narrowing profit margins and sluggish sales growth, sending the stock tumbling after each of the past four quarterly reports. The day after the most recent earnings in February the stock declined 14 percent.

At the time, Chief Financial Officer Frank Calderoni asked investors to “bear with us a quarter or two” while management works on bringing new lines of routers and switches to a higher level of profitability.

Cisco’s gross margin, a measure of profitability, shrank to 60 percent in the fiscal second quarter, from 65 percent a year earlier.

Stock Drop

Cisco shares have fallen 34 percent over the past year, erasing about $49 billion in market value. Today, the stock rose 16 cents to $17.22 in Nasdaq Stock Market trading.

The company has sought to reach a long-term goal of as much as 17 percent annual revenue growth. To spur sales, Cisco has introduced a new generation of networking equipment at the same time as it pushes into dozens of other businesses, including digital cameras, videoconferencing equipment and social- networking tools.

This fiscal year, sales will grow as little as 9 percent as Cisco faces lower spending from governments and market-share losses in its television set-top box business, the company said in February.

“There is a genuine recognition within Cisco that they need to move faster and be more focused,” said Alkesh Shah, an analyst at Evercore Partners Inc. in New York.

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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