John Chambers: Recovery continues, Cisco to hire in the U.S.

John Chambers is often in a sunny mood, but on Wednesday he had some obvious reasons: Cisco posted financial results that blew past Wall Street's expectations, signaling that despite the rough economy businesses are spending on technology again.

I caught up with him after the earnings announcement to get some more detail on why the results were so strong, and whether he's really planning to ratchet up Cisco's (CSCO) payroll by a couple thousand more workers over the next few quarters. Below is an edited transcript of our conversation:

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These are strong results. What product areas did the biggest upside surprises come from?

The interesting thing, Jon, is that the upside surprises were in every category. The U.S. went from flat to up 17%, emerging markets went from down negative high 20s to zero, countries like China, India and Brazil all responded very well. China was up in the high teens, Brazil was up about 30, India was up in the low 20s. In terms of service providers, actually they were up 10% after a really tough quarter a couple of quarters ago when they were down 20%. And if you look at commercial, they were down in the low double digits and this quarter they were up about 10%. The enterprise was remarkably well balanced around the world, with growth of about 7%.

While you're doing well, the overall U.S. economy is not, and some other geographies (particularly Europe) are really struggling. Why is there such a contrast between Cisco's results and the global economy in general?

Three reasons. First, capital spending almost always precedes job creation. The second is that the network's role in terms of everything from collaboration to entertainment to the data center to the consumer is changing, and we benefit from that. Third, I've been around the world in the past month, to the Consumer Electronics Show, throughout a number of emerging countries and Middle East and Gulf states, to Davos where I talked to business leaders and government leaders from India, from Latin America, from Europe, etcetera. Almost every business and government leader would say that versus six months ago, their country's doing better – not necessarily where they want, including the U.S. – but their country's doing better and business is doing better. It's undeniable in terms of capital spending.

You said you plan to hire 2,000-3,000 new people over the next few quarters. Where will those employees be located? And will you be making job cuts elsewhere at the same time?

It's a net gain. Last quarter we added 2,000 people, 1,000 through direct hiring and 1,000 through acquisitions. Going forward, in the 2,000 – 3,000 guidance, that was incremental, not through acquisitions – acquisitions will be on top of that. We'd like to balance it around the world. Assuming that governments create the right environments for job creation, we'd like to balance it about 50% here and 50% around the world.

Cisco sold $130 million worth of Flip video cameras in the quarter, up from $50 million worth in the quarter the year before. That's a lot. What will it take to drive sales even higher, and if strong growth continues, how do you compensate for the profit margin hit?

We look at total revenue growth and total profit growth. That's why we gave margins in the 64% - 65% guidance range [for the current quarter], even though they're above that at the current time.

For us, the Flip is a video architecture play. It plays into cloud, it plays to video both in our personal lives and business. It's not a standalone device play. What you're seeing is, our strategy is working in terms of video playing in business, playing across service provider, playing in sports and entertainment, playing down to the individual device.

Any big takeaways from the World Economic Forum in Davos?

It was different from a year ago. A year ago it was doom and gloom; I was one of the two optimists there and I couldn't find the other one. We said that by the end of the year we felt it would be turning up, and you know, our projection on that was pretty accurate. Key takeaways: All of us have concerns, and we should – it's not a given that we're coming out of this economic slowdown – but it feels pretty good. And I think the key takeaway is, that's pretty much what I saw with key governments and business leaders. Almost without exception.