Cisco: Bad Luck or Bad Attitude?

To hear John Chambers tell it, Cisco Systems Inc.'s $2.69 billion net loss for its fiscal third quarter announced last week was due to economic forces, notably a decrease in capital spending, that Cisco was slow to recognize.

To hear John Chambers tell it, Cisco Systems Inc.s $2.69 billion net loss for its fiscal third quarter announced last week was due to economic forces, notably a decrease in capital spending, that Cisco was slow to recognize.

But a closer look at the shocking plight of the once peerless company exposes questionable fundamental business practices. In fact, some customers and analysts contacted last week said Ciscos problems stem from an arrogant and even lazy sales force, which is too used to taking orders, rather than aggressively selling and serving customers. Others flat out question the innovation-by-acquisition strategy that has been the hallmark of President and CEO John Chambers regime.

If Cisco cannot answer these questions effectively—and the companys performance over the next six months will tell much—then it may never match the heights it attained in recent years, when, for a time, it had the largest market capitalization of any business in the world.

"I came right out and said, I think you guys are lazy; youre waiting for people to be coming to you," said Ginger Smith, a voice analyst in the Midwest who asked that her company not be named. Smith was interested in VOIP (voice-over-IP) products, but when she called her Cisco representative about 10 months ago, what she got in return was an offer to visit the Cisco offices. A week later she got a Cisco textbook on VOIP in the mail with a note from her rep saying, "This might help you."

"At first I thought, That was nice," Smith said. "Then I was a little bit offended because rather than coming out and explaining it to me–I mean it was a textbook."

Tom Miller, senior director of corporate information systems at Affymetrix Inc., in Santa Clara, Calif., and an eWeek Corporate Partner, looked at Cisco for switches but went with Foundry Networks Inc. "We thought that Foundry was a lot more innovative and able to turn around products faster," Miller said.

Cisco has reached the same point IBM reached more than a decade ago, he added. "Cisco is a safe bet. Its conservative; its expensive," he said. "But what real value are they bringing to the industry these days?"

"They got fat and happy and got into just taking orders," said Aaron Goldberg, vice president of Ziff Davis Media Inc., which publishes eWeek. "Turning this around is going to be hard."

Whether Cisco officials recognize the problem is another question. In addressing the companys problems in an analysts conference call last week, Chambers laid the blame at the doorstep of the economy. He said the companys long-term growth estimates for countries with good economies remain unchanged at between 30 percent and 50 percent.

"The speed with which this New Economy moves and the associated peaks and valleys will be much higher and lower than anyone anticipated," Chambers said.

For the third quarter of its fiscal 2001, Cisco posted net sales of $4.73 billion and a net loss of $2.69 billion. For the year-ago period, Cisco posted sales of $4.93 billion and a net profit of $641 million.

The losses, which have been anticipated since Cisco issued a warning a month ago, came from a $2.2 billion excess inventory charge and a $1.17 billion restructuring charge. In March, the company said it would lay off 17 percent of its work force, or 8,000 employees, a number later upped to 8,500.

In the current crisis, Cisco has no plans to resume its feverish pace of acquisitions, said Cisco Vice President of Marketing for Enterprise Systems James Richardson in a press interview following his speech at NetWorld+Interop in Las Vegas last week. However, Richardson said that Cisco continues to have sufficient market capitalization—even with its current depressed stock price—to acquire companies should it choose to.

But it might be difficult for a company that is used to acquiring new technology to develop it from within, said Laurie Vickers, an analyst at the Cahners In-stat Group, in Scottsdale, Ariz.

"I think theyre out of shape," Vickers said. "Organically developed technology in a cutting-edge market—I havent been seeing it."

Cisco officials admit the company trails in some markets. "Juniper [Networks Inc.] has leapfrogged us," Richardson said. He added, however, that Cisco isnt sitting still and will leapfrog Juniper, a maker of backbone routers.

Still, few observers are writing off Cisco. "This company will remain the dominant vendor," Ziffs Goldberg said. "Theyre not going to grow at 30 percent anymore. But they are going to carry a lot of the Internet traffic in the future.