I have been bullish on Cisco Systems (NASDAQ:CSCO) for some time now. This optimism has become increasingly guarded in the face of underwhelming earnings reports, a measly dividend announcement and a sense of disconnect between management and investors at the networking giant. Smaller companies like Riverbed (NASDAQ:RVBD), Juniper (NYSE:JNPR) and Aruba (NASDAQ:ARUN) have been building their names by fiercely pursuing certain parts of the network that Cisco neglected. To sum it all up, Cisco has looked and acted the part of bumbling giant while competitors have picked their pockets.
A couple days ago, Chambers sent an internal memo to the employees of Cisco that change was coming. In this article, I will take a look at that memo and derive what I can from Mr. Chambers wording and subject focus. Hopefully, this can give investors insight into the future of Cisco.
The meat of the memo begins as John describes the positives at Cisco. He says that:
It is clear to me that we have incredible foundational strengths – our people, our relationships, our innovation and our strategy to extend the role of the network. We have anticipated market transitions and made good decisions in capturing them. We are disrupting the data center space. We are redefining the collaboration market. And we have gone big on video, a market that is changing society and business completely.
This is one of the reasons Cisco is so well positioned in networking; despite their status as plodding leader, they have been aggressive in certain areas that have paid off. Their video services are premium and they allow companies to gain an edge through collaboration. One thing you won't see mentioned amongst these strengths is the cloud, where Cisco has yet to really make a statement. He continued to clarify his view of their strategies:
To be clear, I am confident that our vision and fundamental strategy is right – we are aggressively capturing the opportunity to take the network where our customers need it to be. No one has the breadth and scale of Cisco in networking. No one has Cisco's breadth of innovation, the scale and reach of our customer delivery model or our talent and expertise. Cisco's value to our customers is differentiated and it is simple: we globally deliver network-centric platforms that make them more competitive. Our strategy is just as clear — we are extending the network platform to enable collaboration, data center / cloud transformation and video architectures that expand our technology and business relevance to customers and partners on a global scale.
This statement describes Chambers' and many other analysts' view of one of Cisco's main competitive advantages; Cisco is a one stop shop in the world of networking and has been for many years. They allow companies to pick from a veritable smorgasbord of networking and internet solutions, and assemble them in one branded package. This gives companies confidence that the pieces fit. But what is the problem, John? What ails this company that has recently been the subject of such abject market scorn?
Cisco is a great company – we have much to be proud of, and much to look forward to. That said, today we face a simple truth: we have disappointed our investors and we have confused our employees. Bottom line, we have lost some of the credibility that is foundational to Cisco's success – and we must earn it back. 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. I understand this. It's time for focus … As I've said, our strategy is sound. It is aspects of our operational execution that are not. 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. That is unacceptable. And it is exactly what we will attack.
Add to this list a variety of ill conceived acquisitions and an expansion outside the core competencies of Cisco, and you have the basic list that bears refer to when talking about Cisco in the past tense; they'll mention them as a has been, and a won't be. John's use of the word "attack" is very fitting, as that is the only type of response that investors will approve of. Change is needed of the violent and revolutionary variety, not just putting on a good face. Some companies are able to rebrand themselves [ask IBM (NYSE:IBM)] when faced with adversity, but the list of success stories is shorter than those that succumb to obsolescence. So what exactly does he mention in his list of targets for attack? First off:
We will not fix what's not broken. There are numerous areas where we're executing incredibly well for our customers and partners. In these areas, you will see no disruption and you will see nothing less than support and empowerment. Simply put, we will not get in the way of our success. Our five company priorities are established: leadership in core routing, switching and services; collaboration; data center virtualization and cloud; architectures; and video. The importance of delivery to market through our partners is also clear – and we will do nothing but reinforce this.
Ok, this is pretty standard. Obviously they won't rebrand or disrupt (intentionally) the core of Cisco. However, the use of “broken” is an interesting choice, as some would argue their consumer segment has been broken from the very beginning. Could this be Chambers' first allusion at splitting commercial from consumer? Next up:
We will take bold steps and we will make tough decisions. With change comes disruption, and you will see this necessary and healthy disruption as we make meaningful decisions in a timely, targeted and measureable way. We will address with surgical precision what we need to fix in our portfolio and what we need to better enable.
To translate: focus on the things that are successful while trimming with surgical efficiency those fatty parts of the business that have yet to yield dividends. This crucial change in mindset could be what turns Cisco around. There are parts of the business that simply do not fit in Cisco's business model. Although the decisions will be “tough,” Chambers promises to address them with “surgical precision.” That makes me think of a scalpel, I don't know about you. He continues to say:
We will accelerate our leadership across our five priorities and compete to win in the core. Again, our strategy to extend the role of the network will not change. Our approach to leadership in the core amidst this transition will change. In switching we understand that our customers are buying across broader segments and specific needs in this market. We understand that our competitors in this area are fierce, with different business models and architectures. We will not be defined by them. Most important, we understand that our customers want to stay and grow with Cisco. They know we will partner with them to make their business successful and their technology investment sound. They know us well and understand that we will not leave or devalue this business. We need to give them the right reasons to make this transition with us, and we will.
The most important part of this statement is “We will not be defined by them.” This is a direct reference to Cisco's refusal to compete on price alone. They are a premium priced supplier, and have remained steadfast in their opposition to engage in any price wars. Their stance is price performance, as opposed to solely price. If you are a premium provider, however, you must work on those customer relationships as diligently as you work on your products. Chambers addresses that next by saying:
We will make it easier for you to work at Cisco, as we make it easier for our customers and partners to work with Cisco. We will simplify the way we work and how we focus our attention and resources. We will significantly rework our systems, tools and funding models to do this. We will reshape the operational foundation in order to empower our teams, integrate our major functions, and allow our people to focus on inspiring and important work. We created the role of COO to expedite this effort and Gary Moore and I will drive these changes with the leadership team.
I think the addition of Gary Moore might provide fresh insight into the things that can be improved operationally. Obviously, there is some misallocation of resources in terms of funding and people that needs to be addressed. Hopefully, this memo is the catalyst for material reform. However, the results of that reform may be difficult or impossible to see in the short term, which could be frustrating for investors.
I want to leave you with a question: what do you want Cisco to be? I want it to be a company that keeps changing the way the world lives, works, plays and learns. A company that knows how to win and intends to continue that track record. A company that's taking the network where it needs to be, with focus. And at a place that puts people, customers and communities at the core of its values. That's Cisco, no excuses.
Alright, John, time to live up to your own line. This might be your last chance … no excuses.
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Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.