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TheStreet Open House

Cisco's Chambers Plans Emerging Markets Turnaround

Stocks in this article: CSCO

NEW YORK (TheStreet) -- Cisco (CSCO), hot on the heels of disappointing fiscal first-quarter results, has vowed to increase its efforts in emerging markets.

Speaking during his keynote at the networker's financial analyst conference in New York on Thursday, Cisco CEO John Chambers explained that weakness in emerging economies weighed heavily on the company's first-quarter numbers.

"Emerging markets are extremely challenging," he said, but pointed to an eventual turnaround. "This one is largely economic, you will see us bounce back as the economies recover."

Some 22% of Cisco's business comes from emerging markets, although the sector has proved hugely problematic in recent quarters. Cisco's order growth rate in emerging markets fell from a positive 13% during Cisco's fiscal third quarter to a negative 12% during the first quarter.

"We are the canary in the coal mine," said Chambers. "For two decades we see trends emerge two to three quarters ahead of our peers."

The CEO added that Cisco will remain "extremely committed" to emerging markets, noting that the networking giant will increase its efforts in the space. Cisco, he said, will grow its emerging markets headcount and sales coverage by about 5% to 6%.

"We believe that, if we execute well, this market will grow 6 to 10 percent every year," said the CEO.

Chambers also pointed to Cisco's experience in previous slowdowns, such as the Asian financial crisis in 1998, when the company increased its investment in the region. "Everyone backed out, we doubled down," he said.

The CEO used Israel's ongoing technological expansion as evidence of how Cisco can tap into specific nations' needs. "What they have done is standardize on Cisco as they digitize their country," he said. Cisco's discussions in Israel were less about switches and routers, according to the CEO, and instead focused on issues such as job growth, inclusion of the country's Arab population, healthcare and security.

Chambers, however, made no mention of China during his keynote. Cisco made headlines last month when it said that the fallout from the National Security Agency's spying controversy had damaged its business in the world's second-largest economy.

The Cisco supremo painted a rosier picture of the U.S. market during his keynote. "We're starting to see the U.S. to start to recover," he said, noting that the U.S. enterprise pipeline for $1 million, $2 million and $5 million deals was up 20% during the first quarter.

"The big deals are back," he said. "We feel very good about our ability to maintain and grow our enterprise business in the U.S."

Shares of the San Jose-based company have tanked since it reported first-quarter numbers, and Wall Street has highlighted the competitive pressures facing the company. On Wednesday, for example, Citi Research initiated coverage of Cisco with a "sell" rating and an $18 price target, predicting share loss in the firm's core routing and switching markets.

Chambers, however, took a swipe at a number of rivals during the financial analyst conference, citing Cisco's deep links with service providers. "Are you going to bet your future as a service provider on a Juniper, and Alcatel, or a Huawei?," he asked. "That's a battle that we should win every time."

The Cisco chief also gave an update on the company's efforts around software defined networking (SDN), an emerging set of techniques for managing network traffic flows through software. Last month, Cisco launched its application centric infrastructure (ACI) technology, which uses the company's Nexus 9000 router to boost business applications across data centers. ACI is part of Cisco's SDN push.

"You watch how quickly we ramp up opportunities in this market," he said. "We will bring SDN to life -- look at how it is supported in terms of programmability, cost and speed."

Chambers added that just five weeks after launching its ACI, there are already 305 "serious customers" in the pipeline for the technology.

Cisco shares fell 2.78% to $20.30 during Thursday trading.

--Written by James Rogers in New York.

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