Riding on Cloud 9, Cisco paves way to the top

Networking giant Cisco bet big on the cloud computing space a decade ago, and today, it has emerged as a leader in that universe.

In conversation with CNBC-TV18’s editorial director Senthil Chengalvarayan and Forbes India’s consulting editor, Mitu Jayashankar, the CEO and chairman of Cisco, John Chambers discusses his strategy based on market transitions. Below is an edited transcript. Watch the accompanying videos for more. Chengalvarayan: It’s increasingly becoming a wireless world and you are synonymous with switches, routers and in the wire world, your margins are been stretched thin by Juniper and HP and others. In the world of the cloud, you have got formidable competitors - Microsoft, Google, Chambers: No, it’s actually the reverse. Cisco focusses on some market transitions and we are customer driven; the trend being in all those areas that you talked about from Intelligent Networks i.e. switches and routers in services, into the cloud i.e. the data centre activity, service coming together with a network, through video capabilities, which will be 90% of the loads on the internet, through collaborations, social media - all tied together, architecturally solve customer’s business problems that’s what we are about.
We made a big bet on that a decade ago, and upon that, are our top five priorities as a company. If we are right on that, that translates through the market share and more value to your customers. In the last quarter, we grew about 11% and Juniper grew down dramatically, as did an HP.
Analyst projection for this next quarter has Juniper down in double digits, has HP down in mid-single digits, and has Cisco at the 5-7% type of number. There will always be competition. But it looks like the elements of our strategy are the right ones. There are a lot of areas to improve on. I don’t want to say, by any means, we have got it. But the major investments empowered decisions did appear to be playing out very well. Jayashankar: You have come off a really tough year. You had sent a memo in April 2011 where you talked about how you had slipped on execution and discipline and you are talking about all these large trends taking place now. Is the company back on track and have you been able to fix that issue? Chambers: If you look at where we are now, we are gaining share at a very rapid rate versus Juniper. That was a company that many people thought was out and a very rapid rate versus HP. But again, gaining share in the markets that Senthil talked about, we grew at 90% in the data centre and the market that’s growing in the mid teens, entered a server a market combined with networking the most people thought we couldn’t even win. Here, we are growing a 20% a market share in North America, 10% globally. We are executing pretty well.
Having said that, there are many areas that we need to improve on. You never want to miss a crisis and be realistic on what you have to change. So we are more focused in terms of our five foundation priorities, growing revenues faster than profits and about what we are doing in emerging markets around the world. You have got to be very focussed on where you go, but right now, it feels good in terms of what we can control and influence and our strategy appears to be playing out well. Jayashankar: One set of competition you don’t mention is the Chinese companies. We have heard in India that that they have grabbed a lot of market share because they were very aggressively priced. News reports say that they are making a big portion in the US as well especially Huawei. You talked about a very large market share in a market that’s also maturing. Doesn’t that make you more vulnerable? Chambers: I have to think about the causing effect. We always have good competitors. If you are in good growth markets, by definition, you will attract good competition. Players like Huawei will be a good competitor in the future; they compete on price, we compete on architecture. We compete on value addition, customer trust and the ability to really get trusted both by governments and businesses and our ability to do what we said in an open fashion.
There will always be peers around the world and it sometimes rotates on who our toughest competitors were a year ago. You will probably agree, we have done very well versus them. Our competitors five years ago were very small compared to where they were and our competitors of 10 years ago are largely gone. Now the same thing can happen in Cisco if we don’t do transition - that’s what I think a lot of people forget.
Our market is of high-tech moves with tremendous speeds and it’s very rare that the company who leads in one decade is a major player one or two decades later. Max Labs was able to gain market share and increase switch at the present time. We are in routing, switching, wireless and video. Chengalvarayan: You said this is not as bad as 2001. Why is that this is not as bad as 2001 because this is the time when we have seen some customers of yours disappear. I am talking about big financial giants. How was 2001 worse than the current stage we are going through? Chambers: 2001 was a real challenge for the whole high tech industry. Again, Cisco saw the downturn two to four quarters ahead of our peers because much of our business is new every quarter. I used to say I am not sure if that’s good or bad, but it’s bad. But we saw it then. We said it was a 100-year flood, we adjusted properly and we came out with tremendous momentum.
But 25% of our customers disappeared forever and the cutbacks were dramatic. For any high tech company, it was about survival or didn’t understand how tough that was. This last one was an example of the largest recession we have seen during our lifetime, but also one that we came through relatively well.
We were surprised when it first occurred, very quickly learned what we had to do differently, got our expenses in line, instruction ourselves for the future. By the way, most of our peers haven’t even done that yet and that’s part of the reason you see us being successful now as where we are going. Chengalvarayan: Where are these tough spots? Where do you see them? Because 5-7% guidance that you gave for the coming quarter and the next are not as robust as people would have wanted, which is normally 7-8%. Chambers: First, our long-term guidance for the company is actually 5-7%. I have seen a number of tough areas; which we all understand what’s going on in Europe especially Southern Europe. We should understand what we said a year ago. Government spending is going to be very tough especially in the US and it would go from state and local to Federal. We anticipated the financial challenges and we actually saw that again almost two to three quarters ahead of our peers in 2007. You have seen the financial institutions at the present time as you would expect over this year go with very conservative budgets. So I don’t think there is any surprises now within that but our peers are for the first time saying, Cisco was right. Chengalvarayan: So what are these possible tough spots that you really have little control over? Are you worried about spots that you have control over? The transitions that you make into cloud, because it’s done if you do, it’s done if you don’t when you focus away or when you take focus away from your core business of routers and switches you are set to be losing focus and to stick with it. Jayashankar: If I can just add to that question. You have got to play both kinds of strategies - a defending strategy and an attacking one. How do you switch between the two constantly? Chambers: What we play is a strategy based on market transitions. In our industry, you want to learn from the mistakes that you made in the past and your successor and position yourself for the future. So it isn’t about individual products and that’s hard to explain to your audience. It’s about how smart networks made up for routing and switching. It has the cloud, the storage capability, the processor capability and the video. It has the collaboration, which architecturally allows our customers to move faster with us to achieve their business goals.
The grid group within China clearly understands on utilities. Players like Reliance here clearly get it as well as the government leaders. So the way you play offence as well as defend is you tie these together with the best in class products in each category, which most people would say we are pretty close to and you enable them to achieve their business transitions. So what Cisco now is focussed on is how we help governments achieve their goals in terms of education, job creation and healthcare.
How do you help companies research about their space, grow their revenues and grow their profits in a market that is really tough for them? In research market space, we grew at 12% last quarter when our peer Juniper shrunk at 20%. So the architectural approach is winning and there is always importance to get it down to far key fundamental areas we focused on. So actually, I think we are doing a pretty good job. At the end, the important message is not focusing on 25 priorities but really bringing it down to our top five foundational focus points. If you watch that’s what we do at acquisitions as well as our internal developments.
_PAGEBREAK_ Chengalvarayan: Normally, it is very difficult for us to value how much you should take from an acquisition because you have to think along strategic lines not just share, outgo per share. Just tell us the background of the NDS acquisition, you made about USD 5 billion on that, was it to put some life back in the set-top business? Chambers: No. What we are trying to accomplish with the NDS acquisition it goes back not to an individual product. It goes back to where we are going in search providers, it goes to where we are going to data centre, and it goes to where we are going in video, collaboration and architectural play with intelligent networks.
If you watch the set-top businesses are very good growth businesses for us. We also announced new set tops at dramatically emerging price capabilities here in India, designed in India, for India. So you watch us made in India, for India and beyond. What NDS did is it is already in cloud what we call Videoscape.
So it allows us to accelerate our software strategy in the cloud that will be delivered both through set-top boxes and directly into the home at a much faster pace. It does it with tremendous security capabilities ease of use interface capabilities. In set-tops, we are growing pretty rapidly for us and reasonably been gaining share, but the future will be into the cloud.
Interestingly enough, usually when you do a large acquisition like that, your stock is down for quite a few days in a row. Our stock within a couple of days was seen in new all-time highs. So the market liked it, it was new for them, it wasn’t what they expected. Once they digested it, they said “alright Cisco, this makes sense.” Now they are also saying you have to execute, because acquisitions are hard. We probably do it better than anyone else in the high-tech industry and even our hit rate is about 2 out of 3 of 70%. Most of acquisitions failed; this one was pretty good. Jayashankar: Technology is now being run by younger people. How do you stay mentally agile and fit? How do you keep running on this treadmill over and over again? Chambers: A couple of facts – first, the CEO of one of my toughest competitor came up to me about a year ago and said ‘John, I hate to tell you this, but you are going to come through this one even stronger as you have always done.’ He said most CEOs can’t reinvent themselves and most leadership teams cannot.
Cisco does this with tremendous speed and he said, ‘you as a CEO are just better than almost any of your peers’. So leadership has to reinvent themselves regardless of age.
We are into the data centre, we didn’t even have a product for four years and it was actually 5 years before we started to become material to it. So that’s something we do as the company. I think Cisco has always been able to reinvent itself, sometimes it’s a little bit of pain to go through and I wish we can avoid that. We got too fat and we need to take that fat off.
To answer the questions about running, I have run 3-5 miles a day in terms of staying in shape and direction, I love what I do. We were probably an average of 18 years for the last 6 days on the road. Japan, China, India multiple cities – go from 6 a.m. in the morning to 12 a.m. or 1 a.m. at night everyday and I love it. But I have got a team that does that extremely well. So you have to think about Cisco in terms of the whole team, not just the CEO. Chengalvarayan: What trends do you see emerge in India? Is India going to emerge differently from other emerging markets? Will emerging markets give you different opportunities than developed markets? Chambers: We have always believed that emerging markets would grow atleast twice if not three time the pace of our core developed markets. Even in the last quarter, most of our top 5 emerging markets, with the exception of India, grew in high teens.
India has been a little more challenging and I think you have seen that across all industries. Based on the data, we appear to be actually gaining market share even though our business was down in double digits in Q1 and again in Q2.
I met with a lot of the top financial organizations and CEOs when I was in Mumbai and they are actually turning more optimistic. It was different six months ago. They are painting the picture of where they see this country going actually in a very positive way. They looked at my country lead and said you should measure him a growth in the 30% not negative.
So, even though we are gaining market share and it is negative at the present time in large part due to government spending and other issues, I am very optimistic about the future of this country and the direction that we are headed. That’s why we established the second world headquarters here five years ago and when you make revolutionary change people often say “why” and they often doubt especially first couple of years and it takes 4-6 years before you see the results.
I am a huge believer in the largest democracy in the world. If you watch what we do over the next five years; how we did in healthcare, education, job creation, how we helped the Indian companies really be successful in India and beyond and how we used our R&D and services capability to build products made in India for India and beyond.
I am very excited about where we are here, just like – how I run the company, I don’t run it by the quarter or the ups and downs during a year, I look where we need to be 3-5 years down; take the criticisms on what you have to do better however and the same thing in terms of how we invest in India. We are really proud of having our second headquarters here and we are beginning to see the results from that in terms of not just from emerging markets and how our peers in industry get it, but our ability to partner with India. Chengalvarayan: Companies are sometimes very nervous about working in democracies. Indian companies are now slightly nervous about what's happening in America because of the restriction on visas, on the whole outcry against outsourcing. Is there a cause for worry? Chambers: Democracies have strengths and limitations. I still believe its, by far, the best system in the world. I never get confused about a given quarter or a given year. I look at how things would evolve over a period of time. India very much controls its own future. The question is, is it going to be number one, two or three economy in the world? Those are pretty good positions as starting point. If you have watched the standard of living increase that your country has achieved, its been pretty dramatic. The second Silicon Valley for us and for others in Bangalore is very exciting as well. So I am an optimist in the future of India. I think it would not surprise me to see India as number two and may be the number one economy looking out in 20-30 years.
I think all of us have to deal with challenges. If you are asking on the political question, I think they key take away is, over the last decade, politics determine the economies around the world. For this next decade, economies would determine the politics.