Cisco: Press Conference With CEO Chambers and CFO Calderoni

Cisco System (CSCO) CEO John Chambers and CFO Frank Calderoni is holding a press Q&A over lunch as part of the company’s financial analyst meeting today at the company’s headquarters in San Jose. Here’s a live rundown on the discussion:

• Q: On the dividend payout, would you finance it with debt? Chambers: Nope. We’ve got more enough U.S. cash being generated in the U.S. What changed: you used to be able to make 5%-6% on your money, now you can get 1%-2%. Also 95% of the people in the room today at at the analyst meeting support them paying a dividend. He also brought up the repatriation issue once again. Chambers says he is appealing to both parties to make it happen. He says if you bring back the money, they will grow headcount dramatically.
• Q: How many would you hire? He says they would commit to 10% U.S. headcount if they could repatriate the cash. There is a Y in the road coming; at some point next year, if we can’t bring the money back, he says, they will expand more outside the U.S.
• Q: How much cash in the U.S. last year? Last year, $3 billion to $4 billion in the U.S.
• Q: On tax repatriation policy, is there political support? Chambers says political support is starting to build, but that it is also a matter or practicality.� I would be surprised if leaders in Washington did not come to that same conclusions. I think you will find a number of champions emerge, but probably not until after the November election. When things are so very logical, there isn’t any reason not to do this. Here is the one company putting American back to work versus our peers.
• Q: What tax rate of repatriation? Chambers says it has to be single digits – low single digits would be preferred over high single digit rates. He says he would be surprised and disappointed if it did not happen. Another issue could be tax policy changes on dividends, he notes.
• Q: Will you pay dividend even without the repatriation issue? Chambers says they will, but that the issue will be the size of the yield – 1% versus 2%.
• Q: Why pay a dividend? Chanbers says they are proud to be an American company; a large part of the technology they use, they can help create a recovery. It is easier to manage the resources here. China, India, Latin American can’t carry Western Europe and U.S. It’s also just a plain good business issue. With rates in the 1%-2%, Cisco paying a dividend, plus upside from growth, makes the stock more appealing, is basically what he said.
• Q: On competitive set, and Oracle? Chambers says he would rather co-operate with them than compete against them. We regularly meet with Oracle; we are the largest Oracle users in the world in our industry. Look at where their competition lies: HP, IBM, Microsoft. Our view is we would like to partner with Oracle.
• Q: On HP, what do you mean by taking them on in “culture?” Chambers notes that Cisco has high R&D budget, will give raises this year, focused on corporate responsibility; we’re like a family. We are very much united in how we go to market. In our industry, people are everything. It’s a culture and architectural game.
• Q: Has uncertainty at HP helped Cisco? Chambers says Cisco has consistency and predictability. Are we a perfect company? Absolutely not. But it is a pretty good culture. That predictability is a huge competitive advantage to us as a company, he says. Culture is a huge advantage for Cisco.
• Q: WIll you lose any top execs to run HP? Chambers says you don’t compete against your family; many companies in the Valley don’t take that approach. He says he would be “surprised and disappointed” if someone left to join management at a competitor.
• Q: On acquisition philosophy: On the one hand, when do you take the risk; but also it is hard to pay more than a 30% premium in the market. Our premiums are normally in the 30% range or below. Mostly of our peers are subtly saying Cisco got it right – that most customers are going to an architectural approach.
• Q: On customer adoption for the company’s blade servers: Saw this transition coming about six years ago; occurred as we thought; there has been much higher acceptance of the architecture play than we thought. Look at how quickly they reached a combined $1 billion run rate; you begin to recognize how much this will spill over into cloud and virtualization. Looks like many of the top companies in the world will consider a new player in the data center. Chambers adds that he caught the market in transition; and were fortunate enough to get the transition right. It’s not just about the run rates – it is more about how many strategic accounts you have. Feels really good now.
• Q: When do you get to #1 or #2 in blade servers? Chambers says analysts see us half the size of the #2 player in the 386 blade market. You have to be 2 before you can be number 1. (Note that HP and IBM are top 2 in blade servers.)
• Q: On more consumer acquisitions? Chambers says each of the company’s 30 market adjacencies have logical acquisition targets. (But he didn’t quite address whether they might do more acquisitions specifically in the consumer segment to go along with Flip and Linksys.)
• On network neutrality? Chambers says the vision for the U.S. is to get broadband to every American with at least 2 technology choices. We’ve fallen behind the rest of the world. How to get broadband build out. If Title 2 is done the wrong way, you will not have broadband built out. There has to be a way to do the end, to have a certain amount of availability on the network. The high order bit is how to get broadband built – and there has to be a better way than Title 2. And service providers have more job creation opportunity than almost anything else.
• On consumer telepresence? Still expect it to be by the end of this year.
• On the California governor’s race? California is the 48th toughest state to do business in. The education system is in the bottom third. The budget is clearly out of control. That cannot continue. Silicon Valley is a way of life, I very much want to be here. Personally, he is a strong supporter for Meg Whitman to make the changes. (Whitman, of course, is running against former governor Jerry Brown.) “Personal, strong support for Meg.”
• Did HP board make a mistake in letting Mark Hurd go? Chambers says HP is a wonderful company. To second guess a board is very difficult to do. Won’t comment specifically on HP.
• Looking at acquisition targets? Yes, we always look. Probably looking at 50-100 for every one they do.
• How much cash would you like to bring into the U.S.? At a minimum $30 billion. Chambers says there is $1.2 trillion out there held by 650 companies. Imagine what a trillion dollars could do for the economy, toward job creation, dividends, stock prices. It’s the only logical move to make.
• Where does the data center go from here? Chambers says it is evolving exactly as he thought, with adoption of virtualization; that is going very well. The cloud is the next evolution. Those will be private and public. That is one of the biggest short term opportunities going. Will see service providers and enterprise move on that. The phase after that is completely transparent, you will have no idea where things are in the cloud, was it on a Cisco set-top box, or an Apple devices, or at Netflix, or on your TV, or from Disney, or from a service provider out on the Web. That kind of environment, he says, is tailor-made for Cisco.

And that’s it.

CSCO shares have faded a bit after trading as high as $22.17 earlier in the session; the stock is now up 34 cents, or 1.6%, to $21.60.