Virtual success

Giant US computer firm Cisco Systems impressed the financial world again on Tuesday, reporting a 49 per cent surge in first-quarter revenue to US$3.88 billion. Not that it was unexpected. The California-based company, which sells about 80 per cent of the routers and switchers that direct traffic around the Internet, has developed a reputation for coming in not just in the money but in just the right amount of money. Some analysts find this a bit strange. In August, after Cisco beat the consensus earnings estimate by precisely one cent per share - for the eighth quarter in a row - one analyst went so far as to suggest that accounting games were being played. The company's incredibly accurate streak continued in the first quarter. Profit, once acquisition-related costs were eliminated, came in at $837 million, or 24 cents per share. Analysts had expected profit without the costs to be 23 cents per share. 'Managed' earnings? No way, say the folks at Cisco. Try 'virtual close' instead. For the past eight years, the computer-networking kingpin has been perfecting its ability to do a virtual close - that is, close its financial books at any time and with essentially no notice. So far, it has managed to shrink the quarterly closing process from two weeks to three days. Todd Abbott, the managing director of Cisco's Asian operations, claims to do even better: the latest quarter ended on October 31, and Mr Abbott had his numbers ready the next day. Headquarters must have all figures audited and certified, of course, so the official earnings announcement wasn't made until nine days later. 'At any point in the quarter,' Mr Abbott said, 'we can have and we do have a good handle on the dynamics of our business.' This solves the mystery of Cisco's spot-on quarterly reports. A company that always has a handle on its financials is a company that can keep analysts well-informed. Going quarter after quarter without surprising Wall Street is nice, but going quarter after quarter without being surprised is even nicer. Take the Asian financial crisis, for example. Cisco's chief financial officer, Larry Carter, says he saw it coming nine months before anyone else. And he claims to have repeated the feat last year, picking up on the uptick in Europe - and accelerating Cisco's hiring there - long before competitors took note. 'We just have a very real-time view of the world as it relates to our business,' Mr Abbott explained. He should know. He starts every working morning by logging on to Cisco's intranet and reviewing the previous day's business around Asia. There he sees sales by country, customer and product, and the margins and discounts on every deal. A look at sales of remote-access servers is instructive, he says. These servers are the things that allow your Internet service provider to take your modem's call. Although some observers had predicted sales would begin picking up this year after trundling along flat last year, Cisco's supersensitive sales radar started registering a stronger-than-expected rebound in the first quarter. With this intelligence in hand, the company could respond right away. 'Virtual close is more than just closing the books at the end of the quarter. It's about having access to complete, real-time information at any point in a quarter. It's about being able to respond to changes in the market much quicker,' he said. 'That's what virtual close is really all about.' It is also about running a leaner and meaner operation. From bill payment to tax planning, the networking technology that makes the virtual close possible is also generating other benefits: improved productivity, reduced product-cycle times, increased information flows and higher profits. In Asia, Mr Abbott says, customers input their own orders 95 per cent of the time. This has boosted customers' productivity by 20 per cent to 25 per cent because errors are picked up immediately as information is inputted, instead of later in the fulfilment process. It has also increased Cisco's own productivity by 60 per cent because orders are correct on arrival and do not have to be re-entered by hand. Other nuggets of Cisco trivia include the following: 55 per cent of orders pass through the company without any human interaction; 80 per cent of customer and partner queries are answered on-line; sales are more than six times their 1994 level, but technical support staff has only doubled. Last but not least, the company claims to have the highest revenues per employee in its industry and spends only 1 per cent of those revenues on its finance department. Mr Abbott says Cisco is unique in its ability to do a virtual close. So the cynical observer has to wonder why he is eager to pass along the secret of his company's success. Why tell the world when you could keep the competitive advantage of the virtual close to yourself? At this point, Mr Abbott starts to sound a bit evangelical. Or is that e-vangelical? 'We really want to spread the word,' he said. 'This Internet economy is very unforgiving. If you are not first and fast, and continually changing your approaches and services to your customers, then you can quickly be left in the dust.' Mr Abbott says Cisco is pushing the virtual close as a concept not a product, but he acknowledges Cisco will benefit if more companies become network-centric.