“The Worst Is Behind Us.”

Networking giant Cisco Systems is emerging from the recession with a new focus on the future. An interview with Frank Calderoni, EVP and CFO at the...
Edward TeachNovember 1, 2009

Financially, it wasn’t a great year for Cisco Systems. Net sales for the Silicon Valley giant fell by 8.7% in fiscal 2009, to $36.1 billion, and the stock fell below $14 in March before climbing back to nearly $25 in October. But strategically, it may have been a transformative year. Underscoring his desire to leverage Cisco’s dominance in networking and expand into 30 or more “market adjacencies,” CEO John Chambers cranked up the company’s famous acquisition machine — a machine fueled by a $35 billion cash hoard. In March, for example, Cisco bought Pure Digital, maker of the pocket-sized Flip video camera, for $590 million. Six months later the company bid $3 billion for Tandberg, a Norwegian videoconferencing company. Two weeks after that, Cisco offered nearly as much to buy Starent Networks, which makes products for sending data over wireless networks.

Ensuring that these deals make financial as well as strategic sense is CFO Frank Calderoni. A 21-year veteran of IBM and former CFO of SanDisk and QLogic, Calderoni joined Cisco in 2004 and became its finance chief in February 2008. The 52-year-old Calderoni views his role as being “a catalyst of business transformation.” Recently he discussed how Cisco intends to transform itself in the coming years.

Cisco wants to become a lot more than a mere network plumbing company. What’s the vision?

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We believe the network as a platform will enable us to branch out into adjacent markets. Over the past year we realigned our portfolio to invest in the top growth priorities for the company, with additional focus on three areas: video, the data center, and collaboration.

Where will this leave Cisco in, say, five years?

As a very strong, profitable company in the network technology industry. A company that has been able to leverage the network to expand into multiple adjacent markets and across our customer segments from the consumer to the enterprise, as well as service providers.

Won’t a stronger push into data-center products put you in more-direct competition with IBM and Dell, both of which are Cisco partners?

We have partnered for a number of years with those companies, and we continue to feel that there are partnership opportunities moving forward. No matter how you look at it, the technology industry has situations where you partner and others where you compete. It’s just part of the industry.

Despite Cisco’s dominance in networking, its sales fell by nearly 9% this year. What steps have you taken in response to the downturn?

We drove savings in our annual run rate in excess of $1.5 billion through fairly aggressive expense-management actions. We also launched about 15 business-efficiency initiatives to drive productivity across our business — not only to manage through tough times, but also to give us the ability to scale over the long run. And again, we realigned our portfolio to make sure that we’re focused on growth opportunities for the long term.

What kind of annual growth do you envision once the economy turns around?

Our long-term business model anticipates annual revenue growth of 12% to 17%.

That seems ambitious for a company that already has annual sales of $36 billion.

We feel confident that that’s the opportunity for us ahead. We mentioned the data center. Video is another area that we are very optimistic about. There has been a tremendous amount of growth in video usage, and that’s going to continue for a long time.

There’s been a lot of buzz about “smart grids” — using technology to make electrical power grids more efficient. Is Cisco gearing up for this market?

Absolutely. We are investing in smart-grid technology and have already started initiatives with General Electric and Florida Power & Light.

In addition to the corporate world and the electricity grid, Cisco wants to become a bigger name in the home.

The consumer is a key part of our strategy. Consumers are constantly driving video demand; they want the ability to access video anywhere, anytime, and on any device. Our consumer business, which today consists of our Linksys product line and Pure Digital and the Flip video camera, will give us the ability to leverage the network in the home or in business interchangeably.

Cisco has — it’s a staggering number — about $35 billion in cash. Most of it, about $29 billion, is held overseas. Since any cash you repatriate to the United States would be subject to a stiff tax, does that concern you or constrain the company in any way?

No. Many global companies are in a similar situation. We do an excellent job of managing and balancing our cash based on our needs in the United States as well as globally. The acquisition of Tandberg is a good example of where we effectively use our cash outside the United States. Over the last several years, we’ve invested very heavily in what we call our Cisco East campus, in Bangalore, India. It’s become a global services center for us.

During August’s earnings call, John Chambers said there are signs that Cisco’s business may be starting to return to normal — even though revenue for the fourth quarter was down 18% from a year ago.

We’re seeing some stabilization, especially in the United States, and in some markets in Asia. Europe continues to be a challenge, but Europe entered the downturn later than the United States, so it [may] take a little longer to recover. We are optimistic that the worst is behind us.

Do you see yourself as a strategic partner with John Chambers?

Very much so. John, the senior leadership team, and I have worked very well together this past year. Our approach to managing the business was to stay focused on three areas. One is strategy and innovation, in terms of how we allocate our investments in technology, both internally and externally. Two is operational excellence, making sure that we have the right infrastructure for future growth opportunities. Three is executing our strategy on a quarter-by-quarter basis.

Can you give me examples of metrics that you use to track operational excellence?

The most important metric we look at is customer satisfaction, which includes factors ranging from the quality of our products and services to how efficiently we process an order and how quickly we respond to customer needs. We also look at productivity measures in our large organizations, such as sales, services, and engineering.

No doubt you and your finance team have been putting in long hours over the past year.

We try to make sure that we have a balance. We work as hard as we have to, whether it’s in the evenings or on the weekend. That’s part of our culture. At the same time, just like we work hard, we try to play hard, so that we can spend time with our families. We have a good balance.

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