Cisco Systems Chief Executive Officer John Chambers, outlining deal-making plans for the coming year, says he remains in the market for small and midsize software makers and that he’s not getting investor pressure to break up the company.
With the stock of San Jose, Calif.-based Cisco near a seven-year high, “no one in their right mind would want to break up Cisco,” Chambers said in an interview on Thursday, adding that he’s never spoken with an activist investor.
“CEOs should be their own activist,” he said in a separate interview Friday on Bloomberg TV. Cisco has avoided shareholder complaints by responding to their requests for higher dividends and stock buybacks, as well as by making changes to its business.
“I think we have shown an unbelievable ability to reinvent ourselves,” Chambers said in the TV interview.
Cisco will be an aggressive buyer of software companies over time, the CEO said on Thursday, particularly in areas such as cloud services and security. Still, Chambers said valuations are too high for many potential targets.
“Our shareholders are comfortable with us being more aggressive” in making acquisitions, given Cisco’s recent record of holding down expenses, he said. Yet buying at high prices would “not be a good decision for us or for our shareholders.”
His comments followed a strong quarterly earnings report this month from the maker of routers and switches. While Cisco had been under pressure from new technology, such as software-defined networking equipment, the company posted quarterly profit and sales that topped estimates.
Cisco employs more than 4,000 workers and 1,400 contracters at its Research Triangle Park campus.
To rev up growth, Chambers, who is planning to retire by the end of fiscal 2016, is rolling out machines that can handle skyrocketing Internet traffic, its own software-based networking tools and security services, while relying less on sales of specialized routers and switches.
Cisco still faces hurdles. Its gross margin has historically been wider than that of other technology companies in the Standard & Poor’s 500 Information Technology Sector index, but that gap has narrowed to its narrowest level since at least 1990, when Bloomberg began compiling the data.
The biggest lead was in 2003, when Cisco’s margin was 31 percentage points greater than the average of the 65-company index. At the end of 2014, its gross margin was only 10 percentage points wider. Gross margin is the percentage of sales remaining after subtracting the cost of production and is a measure of profitability.
Chambers, who has been boosting dividends and increasing stock buybacks, ruled out selling less profitable units to lift shareholder returns, including the company’s server business and set-top-box division. He said the server business is strategically important for customers who want to rely on Cisco for data center infrastructure.
“Am I in love with set-top boxes? Of course not,” Chambers said. He added that he hasn’t considered selling the business, however. Large carriers such as AT&T and Comcast still require such equipment as they move to cloud-based approaches, so consumers can get to their favorite shows from any device, he said. Cisco benefits by offering set-top boxes, cloud infrastructure and video-management software, Chambers said.
“When you add that together, customers will pay a major premium,” he said.
Set-top boxes and servers have crimped Cisco’s overall margins. Yet Chambers said Cisco has the best margins in every industry in which it competes. He singled out Cisco’s performance in Internet switches, its largest business. Chambers also cited Cisco’s response to software-defined networking, which enables companies to run networking software on cheap commodity servers.
“Everyone said SDN is going to kick your tail and is basically going to put you out of business and your margins are going to go to 45 percent, but our margins are increasing,” he said.
Other networking equipment companies wouldn’t be able to compete with Cisco, given its ability to combine its switches with its servers, software and services.