EXCLUSIVE-UPDATE 1-Cisco chief vows to restore "flawed" company

Tue Apr 5, 2011 2:07pm EDT

* Chambers: Cisco has flaws in operational execution

* "We have been slow to make decisions"

* Last two quarterly results have disappointed

* Shares up 2.2 percent

(Adds details from memo, analyst's comment, share action)

By Rob Cox and Robert Cyran, Reuters Breakingviews

NEW YORK, April 5 (Reuters) - Cisco Systems Inc (CSCO.O) chief John Chambers, in a remarkably candid memo to employees, admitted the one-time technology bellwether and Wall Street darling has lost its way and will need to change to restore its credibility.

Chambers, one of Silicon Valley's most respected corporate chieftains, confessed in an internal email that the networking giant had been slow to make decisions, fallen down on execution and lacked discipline in an aggressive expansion.

In a 1,490-word email on Monday, he warned staff to to prepare for a number of unspecified changes in the next few weeks and coming fiscal year, starting in August.

The long-serving CEO, who has apologized repeatedly to shareholders for missing Wall Street's targets, confessed his company let investors down and confused its own employees.

"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," Chambers wrote. "That is unacceptable. And it is exactly what we will attack."

Cisco's last two quarterly results disappointed the market. In November, the company announced sales growth would be lower than analysts expected. In February, it warned of dwindling public spending and weaker margins from tough competition [ID:nN08294447]. The shares have lost a third of their value over the past 52 weeks.

"Bottom line, we have lost some of the credibility that is foundational to Cisco's success - and we must earn it back," he wrote. "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."

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PROGNOSTICATIONS FLAWED

Chambers called on the company to focus on five areas: routing, switching and services; collaboration; data center virtualization; architectures; and video.

In Tuesday afternoon trading, Cisco shares gained more than 2 percent to $17.41, galvanized by a rebalancing of the Nasdaq 100 that lent a higher weighting to the company's stock. [ID:nN05115132]

Chambers is considered one of Silicon Valley's foremost prognosticators, whose views on industry trends are invariably taken seriously. He was one of the first to warn of the impact of the financial crisis on the sector in late 2007. [ID:nN09228093]

In his memo, however, he confessed the networking giant had been sideswiped somewhat of late.

In past years, with the likes of Hewlett Packard Co (HPQ.N), China's Huawei Technologies Co Ltd [HWT.UL] and Oracle Corp ORCL.O increasingly coming to the fore or reworking themselves into one-stop hardware-software outfits, the company has seen its dominance in networking come under attack.

Heightened competition has pressured profitability. Gross margins slipped to 62.4 percent in the fiscal second quarter from 64.3 percent and the company's third-quarter earnings-per-share outlook fell short of average projections. [ID:nN08294447]

Cisco has also expanded in past years away from its traditional strengths in routers and switches, and into areas such as set-top boxes and consumer devices -- moves some analysts said detracted from its core business.

Sales in both areas fell in the last quarter. Chambers addressed this in his memo.

"Our growth strategy has been based on capturing the incredible opportunity afforded by this massive demand for the network. Many say that in the face of this expansion, Cisco needs more discipline. I agree."

To appease investors frustrated by decelerating growth, the company declared last month its first-ever dividend of 6 cents a share, which gave its sputtering stock price a brief jolt. [ID:nN05121731]

Some analysts said Cisco began to slip during the industry downturn of the past two years.

"Customers were hesitant to change or to purchase and therefore Cisco, instead of focusing on newer products in their core business of switching and routing, were looking at other areas," said Evercore Partners analyst Alkesh Shah.

"Investors are staying on the sidelines with Cisco. People don't know. Is this a growth story still, or will they continue to lose market share?"

(Additional reporting by Tiffany Wu, Yinka Adegoke and Paul Thomasch in New York; editing by Edwin Chan, Ted Kerr and Andre Grenon)

((eddie.chan@thomsonreuters.com +1 213 955 6750; eddie.chan.reuters.com@reuters.net)) Keywords: CISCO/CHAMBERS

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