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Cisco CEO: No spending recovery until '09

John Chambers says slowdown in corporate spending will continue through year-end; hints at management overhaul.

By Scott Moritz, writer
Last Updated: July 9, 2008: 3:25 PM EDT

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Cisco CEO John Chambers, known for his optimism, says tech spending will continue to be slow until next year.

NEW YORK (Fortune) -- Cisco chief John Chambers has some bad news for the technology sector: He no longer expects the recent slowdown in tech spending to pick up until next year at the earliest.

The longtime head of the world's largest maker of Internet equipment also, for the first time, publicly hinted at his succession plan for the company - a touchy subject within Cisco (CSCO, Fortune 500) that may have led to the departure of at least three top executives.

Chambers made his comments in a Reuters interview Tuesday. As one of tech's highest profile executives and a dogged optimist, Chambers tends to command a fair share of attention when he trims his outlook even the slightest bit.

Cisco, which is due to report fourth-quarter earnings in early August, has been modifying its outlook all year as the expanding global recession continues to hurt business. In March he called for the slowdown to last two to five quarters. Five now looks like the goal, and a bullish one at that.

Chambers did not provide a specific outlook for sales growth in 2008, but told Reuters that most Cisco customers won't ramp up spending until early next year. "I think most of us realize that it's probably going to be a little bit longer than the one to two quarters that some people had hoped for," said Chambers.

This probably comes as no shock as the economy weakens amid record fuel prices, rising unemployment levels, and the ongoing housing slump. A recent Forrester Report says overall business tech spending is up 3% over the same point last year, and while that is a slight plus, it is below the expected 10% annual growth rate.

Analysts reacted to Chambers' comments by cutting their forecasts for the company.

"We continue to believe 2009 could be another challenging year for Cisco (CSCO, Fortune 500) and do not believe the stock works until year-over-year revenue growth sustainably reaccelerates," JPMorgan analyst Ehud Gelblum wrote in a research note to investors Wednesday.

Gelblum now expects Cisco revenues to grow 9%, down from 11%, in the first half of next year.

Cisco shares fell 5% Wednesday, taking peers like Juniper (JNPR) and Foundry (FDRY) down 4% in afternoon trading.

No deep cuts planned

Unlike some players in its sector like Alcatel Lucent (ALU), and Nortel (NT), Cisco managed to sidestep the crushing downturn in telecom earlier this decade by expanding into video and cashing in on the continued global growth in Internet traffic, which fueled demand for Cisco's bread-and-butter routers.

But the networking king is feeling the effects of a shaky global economy.

"Thus far, it's still touch and go and for every enterprise reporting improving trends, there's another one citing further deterioration," RBC analyst Mark Sue wrote in a Cisco research report Wednesday.

UBS analyst Nikos Theodosopoulos wrote Wednesday that he wouldn't be surprised to see Cisco report a flat-to-down sequential sales performance for the current quarter, as the slowdown spreads to Europe.

After warning that January orders were "challenging," Chambers cut the April quarter sales growth targets to 10% from 15%, but left the company's long range growth target at 12% to 17%. Cisco started belt-tightening in March, telling managers to limit travel expenses and use up accumulated vacation days.

Chambers, however, told Reuters that he didn't see any need for dramatic cuts and says the company expects to continue expanding in developing markets to help offset slumping U.S. demand.

The last time Cisco made severe cuts was after the collapse of the 1990s Internet boom when it let about 20% of its staff go. Cisco's employee ranks have nearly doubled since then, and Chambers probably does not relish another go-round with the ax.

Concerns about retention

Some analysts think deeper cuts will be necessary, which is why they found Chambers' comments about his succession disconcerting.

Chambers, 58, is in his 18th year as Cisco's CEO and chief mascot. While he has not indicated he plans to retire, he told Reuters that he expects top-level management changes sometime in the next five years.

"In terms of how we evolve our entire leadership team, including the office of the CEO, it's very likely to be different five years from now than it was five years ago," said Chambers. "There will probably be a title of CEO, but the next CEO will probably be more a leader of a council than a 'command and control."

Chambers' comments marked one of his first public discussions about succession - and certainly any plan to dilute the power of the top executive.

Analysts have speculated his retirement plan, or lack thereof, was behind the recent departures of strategy chief Charlie Giancarlo, who was widely seen as Chambers' heir apparent, as well as No. 2 executive Mike Volpi and Jayshree Ullal. Ullal was a rising star who headed Cisco's switching group, its biggest business.

"If Cisco in fact takes a collaborative approach to the corner office, we believe they would have taken their management experiment a little too far and would expect more defections from the senior ranks," JPMorgan's Gelblum writes. To top of page

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