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< StockTalk >
TMF Interview With Cisco Systems Executive Vice President Don Listwin

March 9, 1999

With Brian Graney (TMF Panic)

Cisco Systems (Nasdaq: CSCO), based in San Jose, California, is a provider of networking products for the Internet, including routers, local area network (LAN) switches, dial-up access servers, and network management software. Since going public in 1990, Cisco's annual revenues have increased from $69 million to $8.5 billion last year and its share price has risen 36,000%. We talked with Cisco Executive Vice President Don Listwin about the company's products, its strategy, and its place in the Internet economy of the future.

TMF: So, how are things in the networking business today?

Listwin: They're good. The overall data networking business continues to grow 30% to 50% year-on-year, depending on the macroeconomic conditions and the geography we're in. The new world of the service providers, where they're moving from old circuit-based technologies to new IP- [Internet Protocol] and ATM- [Asynchronous Transfer Mode] based technologies, is being very well accepted. Those markets are growing anywhere between 50% and 100% year-on-year, depending on how deregulation and competition is actually effected. In any event, the enterprise is a strong growing business and the service provider is a great new opportunity for us.

TMF: Despite all of the press your company receives, I can't help but feel that what makes Cisco tick is still a mystery to most of us. If you could tell us, why is a Cisco router better hands-down than any other product out there?

Listwin: To answer the first part of the question, it's "customer first" that makes Cisco tick. We have a really strong focus on listening to what the customer needs. Of course, the router is only one of the now 15 product elements that we deliver, so I think one of the commonly held misconceptions in the community is that we are just a router vender. Rather, we have around 15 different business units that have a variety of different flavors of products.

Why I think Cisco is superior is that we listen to the customers and we solve their problems. And we do it in a standards-based way that will allow them to be able to expand their network with different choices as they have different problems in the future.

TMF: Besides the emphasis on customers, what else makes the company so different from the other players in the networking market?

Listwin: The customer focus is first, and I think the technology agnostic is second. We basically don't care what technologies we use to solve the problem and are very willing to do whatever it takes to solve the problem. From an execution perspective, we use, I think, a pretty well-refined mix of internal development, acquisitions, and partnering to be able to solve those customers' problems. I think we have a unique capability in all three areas.

TMF: Over the next five years, which companies do you think will be Cisco's largest rivals?

Listwin: In the recent weeks, you've seen some dramatic consolidation ongoing in the traditional data-com players being acquired by the telecom players. I think its very clear that the battle will center around the Internet. The players that will emerge in my mind are the ones that know how to develop around an open standards environment [and] solve the problem of wireline and wireless based Internet. So, in that regard, we certainly believe that Lucent (NYSE: LU) has the capabilities of emerging. We certainly believe a company like Nokia (NYSE: NOK.A) has the capabilities of emerging with its strong wireless position. And we certainly believe that we will be number one or number two five years from now.

TMF: Could you talk a little bit about what Lucent and Nortel (NYSE: NT) are doing in the IP telephony business and how that will affect Cisco going forward?

Listwin: I think Lucent has [been] very aggressive in their marketing in respect to their capabilities. They've acquired, I think, 19 companies in the last 28 months. So clearly, Bell Labs is not producing the types of technologies that their customers are demanding or they wouldn't be out doing this rapid set of acquisitions. My sense is that at this point they [do] not have a lot of software that makes this all work.

I think Nortel and Bay are executing along the voice/data/video playing field. They have a much stronger enterprise offering. We need to be wary of not listening to the marketing rhetoric of Lucent and missing the Nortel/Bay and/or Nokia/Ericcson (Nasdaq: ERICY) types of competitors.

TMF: What do you think Cisco will look like in five years? Are there emerging technologies out there that you feel will be become a larger part of the company's business than they are today?

Listwin: Five years from now, if we execute, we can be anywhere between two to four times the size we are today. That's a $30 billion to $50 billion company. That's not exactly a financial forecast per se. But if we execute well, the market certainly is there. By all measures, that is a different kind of company.

My vision for the Internet is that it is a highly personalized communications experience, where mobile, wireline, and multimedia communications will all become a reality, past [their depiction in] the great movies we watch, like Back to the Future. I actually believe that we've hit technology flashpoints that will make many of these things a reality.

From an internal business perspective, I think you'll see five years from now that we are very much in the transporter/transmission business for the service provider area, which we are just starting to get into with announcements last month. I also think we'll be participating in the networked Internet application area. Meaning, technologies that are very central to networking, such as messaging, will be technologies that will be in Cisco's portfolio.

In summary, you'll see us expand into all areas in the service provider area. We do not intend, incidentally, to be in the network and systems integration business. We expect our partners in the Internet ecosystem to grow and prosper in that environment.

TMF: Which companies working in the networking or Internet space do you personally respect the most? Besides Cisco, who else "gets it?"

Listwin: I think Hewlett-Packard (NYSE: HWP) "gets it." Hewlett-Packard has become a very close partner of ours and they recognize that if they participate in an overall solutions delivery around this open standard ecosystem, we can both benefit. H-P will be working on, for example, a lot of systems integration, network integration, and applications hosting environments, while we will be dealing with a lot of the Internet infrastructure. Very much, at least in the leadership I deal with, I think they are a company that does really understand the opportunity in the Internet and how to participate.

TMF: Cisco generates a lot of cash. Where are you going to continue deploying this cash to keep building shareholder value?

Listwin: I think the board's strategy relative to cash is to continue to build cash reserves for two potential uses. If the market does downturn and we do want to continue our acquisition strategy, it may make more sense to use cash for acquisitions. Also, with the ongoing dialogue in Washington about write-downs and poolings and the like, we may be forced to use cash more than we want to.

I'd like to take the opportunity to suggest that it is very much our position that pooling is an advantage in the Internet economy for companies large and small. It is a transaction capability that helps smaller public companies particularly compete with larger companies. We would like to not see a change in the accounting practices [that would] take away that type of flexibility in the Internet economy.

TMF: What do you think is the biggest challenge facing your company in the near-term?

Listwin: The overall biggest challenge is to ensure that we can deliver the sets of new services that our service provider customers want to continue growing their businesses. Much of the service provider area is driven by a competitive environment and I think it's really important that we deliver the services that are going to help the service providers make money. If they make money, we will have a very strong New World business.

In the enterprise space, I think our major challenge is going to be to add additional technologies -- the Internet services, the Internet applications -- that solve whole problems for our customers. That means moving us out of just the applications space and into doing very tightly focused additional software. That will be a chance for us to learn from a distribution, support, and development perspective.

TMF: What do you think are some of the most important attributes needed for a company to be a successful Internet company in the years ahead?

Listwin: I think the time-honored tradition of making money will probably be one of them, although we seem to have somewhat lost that focus. So, people are going to ask for profitability and a return.

I think the second thing is that companies that compete in a standard-spaced open environment and know how to compete in that environment are going to be successful companies. And lastly, the ones that measure time and move quickly to get the solutions their customers want in a timely fashion, those are the ones that are going to compete, as opposed to the fact that they are large or cash rich.

TMF: Thank you very much for taking the time. I really appreciated it.

Listwin: My pleasure. Thanks.

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