Cisco’s Chambers: Signs of Life

Cisco Systems (CSCO) CEO John Chambers was kind enough to talk with me for a few minutes this evening after his company reported fiscal Q4 revenue and profit per share that beat estimates, on a 4% rise in sales, and a fiscal Q1 view that was somewhat light relative to analysts’ growth expectations, projecting 2% to 4% year-over-year sales growth versus the average 3.7% projection.

Chambers noted that there are signs of hope for the beleaguered U.S. state and local governments, whose sales with sales rose by 17% in the quarter, year over year, better than the 7% growth seen in Q3, and a reversal of declines in prior quarters. “We need to see another 45 days or so to know whether this is really a turnaround” with respect to state and local spending, said Chambers. “These are just early trends we’re seeing.”

Cisco’s business with enterprise and commercial accounts was also surprisingly strong, with sales to its 29 largest global corporate accounts rising by double-digits, year over year. When I asked chambers if that was from an increase in Cisco’s share of their spending, or simply CEOs becoming less concerned about the global macroeconomic risk, he said it was a combination of both.

“What we’ve been good at is to call the turns in things,” Chambers said, meaning gauging when conditions in a market are about to change significantly, pointing out that Cisco preceded its competitors in calling out weakness in state and local government spending.

Regarding Cisco’s announcement that it raised its quarterly dividend by 75%, to 14 cents a share per quarter, giving it a roughly 3% dividend yield, I asked Chambers how the company had arrived at its intention to pay out at least 50% of its free cash flow annually in the form of dividends and buybacks.

Chambers said that was the minimum the company determined it could afford with or without being granted rights to repatriate overseas cash without a tax hit. Cisco, like most companies, has most of its $48.7 billion in cash and equivalents parked overseas. And so the consequent tax hit the company would suffer if it brought that cash to the U.S. has been a concern for Chambers for a long time now. I asked him what a theoretical maximum payout level might be with or without being granted repatriation permission. He declined to provide a figure, saying he didn’t want to presume too much about what can happen with market conditions in any given year or quarter.

“The good news is our cash generation is very good,” said Chambers, “and one of the things we’ve always been able to do is to look out for the best interests of shareholders.” Cisco had $10.4 billion in free cash flow last year.