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Personal Finance – What share price?

For many in the UK, Cisco Systems first burst onto the scene about two years ago as part of Nasdaq’s television ad campaign. Cisco, the company whose products ‘make the internet work’, was exactly the sort of stock that Nasdaq wanted to publicise in its attempt to show what could be achieved by companies listing on the American upstart tech-based share market.

Like the rest of the internet generation, Cisco’s shares topped out a year ago, at a time when the company was valued at almost $600bn. But this is no ordinary dotcom slump.

True, the company is today worth about a quarter of what it was. The difference is, with some 40,000 employees worldwide, Cisco is a substantial, profitable business in its own right.

Revenues in the year to end-July 2000 rose 55% to more than $18bn, while net income was up by almost a third to $2.7bn. For 14 successive fiscal quarters, in fact, Cisco Systems beat US analysts’ earnings per share forecasts by one cent per share.

February’s Q2 announcement would have been the 15th quarter in a row, but Cisco missed its forecasts by one cent per share. In effect, Cisco undershot real expectations by two cents and saw the thick end of $40bn wiped from its market capitalisation in a single day as its shares fell 15%.

FD of Cisco’s UK activities, Mike Tierney, however, remains about as upbeat as it’s possible to be. ‘Our long-term outlook is still good and we still expect to grow 30-50% a year. We still have a lot of confidence in the market, we’re still investing in the future, and we are still developing products,’ he says.

When companies that have grown as unrelentlessy quickly as Cisco has – headcount was up 110% in 18 months – start to apply the brakes, however, that can create real cultural difficulties. Like novice investors caught in their first bear market, optimism can quickly turn to ill-thought-out, self-feeding panic. Tierney admits that this can be a problem: ‘You need a steady hand on the management helm to concentrate people on the job they’re meant to be doing. People don’t want to talk about a slowdown: if they talk too much about it, it actually happens.’

Cisco’s technology – but more importantly, its management ethos – allows it to close the books remarkably quickly: it operates a so-called 24-hour close. The company’s month-ends and quarter-ends are on Saturdays and, by noon on the following Monday, the system has churned out an income statement.

By close of play on the Monday, it’s got a balance sheet. All the schedules are completed by Wednesday, and the board discusses the figures on Thursday.

If it’s a quarter-end, then a statement is released to Nasdaq after hours on the following Tuesday. So within ten days of a period-end, Cisco is telling the world how well it did.

There are several factors – some of which are unique to Cisco – that enable it to achieve this sort of performance. First and foremost was the management’s determination to get better information, faster, to give the company competitive advantage.

New systems allowed them to capture revenue data up to the previous day.

Then they worked with the manufacturing arm so they could quantify, say, on a Wednesday, where they would finish on a Saturday by looking at shipment and manufacturing schedules. ‘Necessity is the mother of invention: they actually went and did the thing just because they moved the meeting – simple, really,’ says Tierney.

When asked what the biggest hassle is in his job, Tierney talks about the difficulty in recruiting new staff. Then he surprises. ‘I’d like people to not focus on the share price of the company,’ he says, seemingly flying in the face of what shareholder value creation is supposed to be about.

‘There is too much focus on the share price. Every permanent employee in the company gets share options – what level you’re in dictates what amount you get – but in the good times, that’s great.

‘Last year it was over-inflated with the bubble. Now we’re in a period of uncertainty, senior management and I have to try to convince people to take their eye off the share price. Focus on what you’re meant to be doing. You wish people wouldn’t let it distract them.’

The problem is that Cisco may not be a normal dotcom, but it can hardly avoid all the wreckage of failed and failing internet companies. To use a 19th century analogy, Cisco has been benefiting from the railway boom by making steel rails, not by running railways – but if the steam is coming out of railways then there’s no market for the steel.

So what, in Tierney’s opinion, is the outlook for the internet economy, given that surfers appear to be staying away in droves – and even B2B projects are being hit?

The bursting of the dotcom bubble has tarnished the reputation of e-business, he says. ‘Fortunately, there’s an awful lot of really good stuff happening at the basic business level using the internet.’

He cites, for example, ‘huge numbers of productivity gains’ companies are making by using networks and web pages better. ‘I personally think there’s a huge way to go.

‘There are huge savings to be made within industry still. If common sense is applied and people see the things that they can do on the internet, then it’s saving real money in everyday situations. You can save money by combining your data and voice networks.

‘You can save a lot of money by taking intermediaries out of passing data from one system to another, or data from internal customers to external customers. It’s just passing information, but if it saves you setting up half a call-centre, it’s quite rewarding.’

– Andrew Sawers is editor of Financial Director magazine

A longer version of this feature appears in the April issue of our sister publication Financial Director.

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