John Chambers, CEO of Cisco Systems

This is a partial transcript from Your World with Neil Cavuto, November 6, 2003, that was edited for clarity.

Watch Your World w/Cavuto weekdays at 4 p.m. and 1 a.m. ET.

NEIL CAVUTO, HOST: Tech giant Cisco Systems seeing its stock jump 5 percent in one day. Cisco’s quarterly earnings jumping 76 percent. That surprised a lot of folks, topped estimates, and may be signaling what could be the start of a rebound to tech spending.

Is the recovery gaining strength then? Who better to ask than the guy who runs that company, John Chambers, the CEO of Cisco Systems.

John, good to have you.

JOHN CHAMBERS, CEO, CISCO SYSTEMS (CSCO): Neil, it’s a pleasure, as always, to be with you. Thank you for having us.

CAVUTO: Everyone’s saying, John, the tech spending boom has begun. Has it?

CHAMBERS: I think the economy began to turn around about two quarters ago, and that’s what we said one quarter ago in our conference call. It’s a very gradual economic growth, and the question is how long will it last and what kind of strength will it have. If you track GDP growth around the world, usually the tech spending follows shortly thereafter.

CAVUTO: All right. Now IBM and Intel, when they came out with their announcements, they didn’t sound quite as robust, and so I see kind of the three horsemen here, two are not in sync. What’s the deal?

CHAMBERS: Well, I think that’s one of the caveats that you ought to be aware of. We clearly saw very good growth in service providers, which none of our peers saw, and we began to see almost for four or five months now gradual improvement in the enterprise.

So one of the things that we want to watch very carefully -- and the reason we encourage people to be conservative the next quarter or two -- is we may be a little bit out in front of some of our peers on this one.

CAVUTO: Let me ask you, too, about sort of a switch in the mix of your business, and that is more toward the telecom side, which was as beaten down as you can get beaten down. Is that a whole new baby for you? How would you describe it?

CHAMBERS: Well, the telecom business used to represent about 20 percent of our business just a couple quarters ago. It’s now up to 25 percent of our business, give or take a point or two.

But, when you think about our business, Neil, you want to think of traditional core routing and switching, the telecom or service provider space, and then the six new advanced technologies we have, such as security, IP telephony, storage, et cetera.

CAVUTO: All right. But you’re also looking at people who typically don’t like to spend on this kind of stuff unless they see the light at the end of the tunnel. Where are they not seeing that light? Where is the spending the most conservative?

CHAMBERS: Well, it’s conservative in almost all groups. The service provider area is what we thought was going to be the most conservative, but we grew last quarter 10 percent over the prior quarter and 20 percent year over year.

If you look at the CEOs across the world, about half of them feel like they’ve got a little bit more wind at their back. The other half feel better, but they haven’t seen the results yet.

And it usually takes one to two months after they see the results before they start to spend on cap-ex and then, unfortunately, one to two quarters after that before they start to hire and you see the reduction in the unemployment numbers.

CAVUTO: Do you think that the president’s tax cuts gave this economy a boost?

CHAMBERS: I think the tax cuts were very much needed. I think you had multiple things contributing to the boost. But I think our fiscal and monetary policy were absolutely major contributors, both by the fed and by the tax cuts, yes.

CAVUTO: The reason why I ask you, John, is, you know, Alan Greenspan was speaking today on his concern about deficits and that they could rear their ugly head and be a real problem down the road. I’m paraphrasing. Do you share that concern?

CHAMBERS: Well, I think Mr. Greenspan has much more experience in this area than I do. The one thing that I believe in and we predicted five to six years ago, you could drive productivity of a country not at 2 percent to 3 percent, but 3 percent to 5 percent was possible, and no key economists, including our own, believed that was possible.

We’re now realizing that if you can grow productivity at those type of numbers, you can drive GDP growth at higher numbers than people anticipated, real income increases, and also advantages to the budget. But it is a very complex equation to the point that you just made, Neil.

CAVUTO: You know, there’s that army of people who love to short your stock, betting that you’re just a house of cards ready to fall, and they base that on the notion that even with your comeuppance from your high 1999 and 2000 days, you are still way overvalued, all too rich stock. How do you answer them?

CHAMBERS: Well, I believe if you get the business results, the stock will take care of itself. In a company that’s making a billion dollars a quarter, when just a quarter ago our peers were losing a billion dollars, I think that in and of itself speaks for itself.

We generate between a billion and a billion-and-a-half free cash flow per quarter. Our profitability growth is really what determines the stock’s future. So you’ve got to determine what you think our growth rate will be, how well do you think we’re going to focus on gross margins and our expense levels.

And, obviously, so far, we’ve done well versus our peers, and, if you look at the industry over the last eight years, where many companies have gone up just a little bit, our stock’s up a thousand percent, and our profitability is as well.

CAVUTO: All right. Now productivity also very strong in the latest quarter because a lot of companies like your own are juicing things up, but they’re not hiring a lot more people. Are you in inclined to hire more people who are planning to do that?

CHAMBERS: Neil, I think you will see our hiring start once I get my productivity to a certain level, and that’s what I think you’re going to see from a lot of companies, so...

CAVUTO: When? When would that be?

CHAMBERS: When we hit 700,000 per employee. We’re currently now at 594,000 per employee, and that was a 9-percent increase over last quarter.

So our own view is that you’ll see business revenues start up first. You’ll see then them spending on cap-ex two to four months later. Then you’ll see them hiring two quarters later.

And you’ll track it through each industry, small to medium business first, then specific industry vertical second, then on to areas like service providers.

And, so far, that appears to be what is exactly happening.

CAVUTO: All right. We’ll be watching closely, John. Always a pleasure. Thanks you for coming.

CHAMBERS: Neil, my pleasure. Thanks for having us on your show.

CAVUTO: John Chambers, the CEO of Cisco Systems in San Jose.

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