THE TRUTH ABOUT CISCO: John Chambers Has Failed
Cisco CEO John Chambers is one of the most revered executives in the history of the technology industry.
Since talking over as CEO of Cisco in 1995, Chambers has grown the company's revenue from $1 billion to more than $40 billion. For 15 years, he has been a soothing, straightforward presence in the industry, free of the bombast and arrogance that so often characterizes big-league CEOs. He has won plaudits from Wall Street to Washington, and been held up as a shining example of American business at its best.
Back in his early days at the helm, Chambers deserved this near-universal praise.
But it's time everyone recognized the much-larger reality:
For more than a decade, John Chambers has failed.
Chambers' shareholder-value-creation strategy has failed. His growth strategy has failed. His management structure has failed. And the result is that Cisco's stock has been dead in the water for more than a decade, even when measured from the bottom of the NASDAQ bust.
Ten years is a long time--plenty of time to evaluate a CEO's performance. And based on Chambers' performance, as Cisco begins its latest re-organization and rebuilding, it's time for Cisco's board to seriously consider giving John Chambers his walking papers.
A Booming Market, A Dead Stock
One of the primary jobs of a CEO is to create shareholder value. In this arena, Chambers's failure is undeniable.
Creating shareholder value is not the same as "growing revenue." Anyone can "grow revenue," especially through acquisition. All you have to do to "grow revenue" is buy companies. It doesn't matter what you pay for them.
To create shareholder value, however, you have do two things:
1) grow earnings per share, and
2) persuade investors that you can continue to grow earnings per share at a compelling rate and therefore deserve a healthy valuation multiple.
Chambers has grown Cisco's earnings per share over the past decade--Cisco's EPS have climbed from $0.36 in 2000 to $1.36 in 2010--but he has increasingly lost the confidence of the market. (And in the past 5 years, considering the explosive growth of the markets in which Cisco operates, Cisco's earnings-per-share growth has been pretty lame: Cisco earned $0.89 per share in 2006.)
What Chambers has failed to do is persuade the market that Cisco's future earnings per share growth will be reliable or compelling. As a result, the stock's multiple--the price investors are willing to pay for $1 of Cisco's earnings--has continued to compress. And as a result of that, Cisco's stock has basically been flat for a decade, while the NASDAQ and S&P 500 have soared.
Over his entire tenure, he has done well: Cisco's stock is up about 500%, or 2X the appreciation of the NASDAQ.
But almost all of this outperformance came in the first 5 years. For the past 10 years, Cisco's stock has tracked--and then lagged--the NASDAQ
Importantly, Chambers is not being penalized here for the bursting of the tech bubble. Cisco's stock is down ~80% from its peak in 2000. But that's not the problem (and not Chambers' fault). The problem is that Cisco has underperformed from the bottom of the bust.
Cisco's Growth Strategy Has Failed
One reason the market doesn't believe that Cisco will have strong earnings growth in the future is because the company's revenue growth is no longer compelling.
Cisco has basically doubled revenue in the past 10 years, from $19 billion in 2000 to $40 billion in 2010. Doubling revenue over a decade when you buy as many companies as Cisco does and operate in a market as compelling as Cisco's isn't all that impressive. And in the past three years, Cisco's revenue has been flat.
One of the reasons Cisco's growth has been so flaccid, we would argue, is that Chambers is trying to do too much: To attack fast-growing markets, Chambers has moved Cisco beyond its core network equipment business into the consumer market, which is obviously a very different business. Both of these businesses are difficult, and they are not "synergistic." As Cisco's recent disastrous purchase-and-shutdown of the "Flip" handheld camera business illustrates, Cisco is far from competent in the consumer market. Cisco should probably cut itself in half.
Chambers' Management Structure Has Failed
Two years ago, the Wall Street Journal detailed a management structure at Cisco that was so byzantine and bureaucratic that it prompted us to wonder aloud whether John Chambers had lost his mind. (Basically, Chambers was requiring hundreds of Cisco's top managers to spend at least a third of their time sitting on committees.)
And it turned out that Chambers had lost his mind.
Recently, as part of Cisco's latest reorganization, the company announced that it was abandoning the absurd system, which presumably contributed to Cisco's lousy recent growth.
IN SUMMARY: John Chambers Has Failed
At a base level, a company's chief executive is responsible for two things: A strategy to create shareholder value, and the company's execution of that strategy.
For the past decade, Cisco's John Chambers has failed at both.
Maybe Cisco's problems are intractable. Maybe the networking equipment business will never grow at a compelling rate again. Maybe the company's best strategy to create shareholder value is to massively cut costs, buy back boatloads of stock, and pay a huge dividend. Regardless, it's probably time to give someone else a try at the helm.
