Cisco’s Recession Playbook

Make no mistake about it, the current economic slowdown is real, but that’s not a reason to give up on growing a technology business. At least that seems to be the outlook of Cisco CEO John Chambers. Chambers used his company’s earnings call Wednesday to lay out the Cisco playbook for getting through challenging economic times.

Chambers also delivered his firm’s first quarter fiscal 2009 financial results, which showed the effects of the current global economic crisis.

For the first quarter of fiscal 2009, Cisco (NASDAQ: CSCO) reported net income of $2.2 billion ($0.37 per share) which is down by 0.2 percent from $2.21 billion (($0.35 per share) in the first quarter of fiscal 2008. Net revenue at Cisco for the quarter hit $10.3 billion, an increase of 8.1 percent on a year over year basis.

The bigger hit from the economic downturn will come next quarter. Chambers provided guidance that Cisco is expecting total revenue for Q2 2009 to be down 5 to 10 percent year over year. Part of Cisco’s plan to deal with the slowdown is to put additional focus on managing its expenses.

Chambers noted that Cisco is looking to reduce its overall expenses in fiscal 2009 by $1 billion.

“We do believe challenges we have seen in the US have expanded to Europe as well as many of the emerging market countries and finally into Asia,” he said. “But if there is one lesson learned from the preceding economic challenges that Cisco faced in 1993, 1997, 2001 and 2003, it is the importance of taking action early without loosing track of long term objectives.”

Chambers outlined Cisco’s playbook for getting over the recession which starts with observing four basic guidelines.

“First is to examine whether it’s the macro environment or the strategy,” Chambers said. “Candidly determine if the slowing of your business is due to market forces and your strategy is working well or if the challenge is largely self-inflicted. If your strategy is working well stay focused on its implementation.”

The second guideline is to determine the magnitude of the slowdown . Based on an estimate of the length and depth of the slowdown Chambers suggest that vendors should realign asset utilization appropriately.

The third guideline is to prepare for the upturn. “Start preparing for how you will gain share and differentiate yourself against peers as it relates to profitable growth,” Chambers said.

Build stronger relationships

Chambers last key guideline is to expand customer relationships.

“Use the slowdown as an opportunity to build even stronger relationships and differentiation with your customers,” Chambers suggested.

The current slowdown is also not the same type of networking meltdown that occurred in 2001, which is something that Cisco competitor Juniper also referenced in its recent earnings call. In response to an analyst question, Chambers said there are very few comparisons to 2001.

“2001 was a high tech driven crisis and our growth rate went from 50 percent down to t minus 45 percent in literally a period of a month and a half,” Chambers lamented.

In the 2001 slowdown Chambers noted Cisco lost 25 percent of its customers as the Web 1.0 era came to a close. This time around things are different.

“2008 is a different model the financial health of the majority of our customers is actually pretty reasonable. This slowdown is driven by consumer and financial challenges, credit and the availability of cash,” he said. “The role of the network has changed dramatically and it’s a value to our customers way beyond transport.”

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