Cisco Systems reported its fiscal first-quarter earnings yesterday. While the market responded favorably, both in after-hours trading and in regular trading early today, some analysts questioned whether Cisco has embarked on an extended period of smooth sailing or is merely experiencing calm before further storms.
That particular vein of prognostication, while interesting, is not what I want to address today. Instead, I want to draw attention to comments made in the last couple days by Cisco CEO John Chambers, both in interviews and on Cisco’s earnings call.
As we know, Cisco possesses a vast cash hoard, most of which sits offshore. It’s no secret that Chambers and the Cisco board of directors would like to see the U.S. government provide a repatriation-tax holiday. That was unlikely to happen before a U.S. presidential election, but now that the voting has occurred and the ballots have been counted, Cisco and other U.S.-headquartered companies with massive amounts of offshore cash might be anxious for some near-term tax relief.
In a series of interviews this week, Cisco’s Chambers repeatedly extolled the virtues of Canada as a potential destination for a large portion of Cisco’s cash holdings. Chambers says Canada is the world’s “easiest place to do business,” citing the country’s federal corporate-tax rate of 15 percent and its “great education system.”
Now, Chambers could sincere about what he says about Canada — as a Canadian, I certainly have nothing against the place, and I would welcome Cisco investments in the country — but I think Chambers has other motives. He’s talking about moving money to Canada, but he hasn’t done it yet. When people talk before they do something, they’re often sending messages, either explicit or implicit. In this case, Chambers is speaking to the U.S. government. He’s saying: “Hey, if you don’t give me my tax holiday, I’m not going to repatriate my cash to the U.S. Instead, I’m going to take a huge pile of it to Canada, where I get a better deal from the government.”
If the U.S. government doesn’t budge, would he actually follow through on a Canadian cash expedition? It’s possible, I suppose, but Canada, while offering lower federal levels of corporate taxation and an education system that Chambers lauds, doesn’t match the U.S. in the range of investment opportunities it would offer. How many Canadian companies, for example, would Cisco wish to acquire? Answer: Not many — and, no, Research in Motion (RIM) would not be among them.
Yes, Cisco could hire some Canadian engineers, provide early-stage funding to startup companies, and spend some money on relevant research initiatives at Canadian universities. But that would not require tens of billions of dollars. So, while Chambers is talking about Canada, he’s actually talking to his own government in Washington, D.C.
Now, let’s shift our focus to China, another country mentioned by Chambers on the Cisco earnings call. Cisco’s sales in China were flat in the first quarter, but the company’s leadership team knows that China will be critical to Cisco’s future growth. Despite the national-security concerns that have inhibited expansion by Huawei and ZTE in the United States, Chambers does not foresee a trade war with China, which has amplified recent rhetoric about what it perceives as Western protectionism.
ZTE: Back in Cisco’s Good Books?
As for Huawei, Chambers said Cisco is more than holding is own competitively against China’s largest networking company. What’s more — and this is the interesting part — Chambers said he sees ZTE as more a partner than a competitor, and indicated that he’s open to “expanding that relationship.” If one considers ZTE’s product portfolio in relation to Huawei’s, what Chambers says make sense. But there’s another aspect to this story (as there often is).
Some of you with relatively good intermediate-term memory will recall that Reuters reported on October 8 that Cisco had ended a longstanding sales partnership with ZTE “after an internal investigation into allegations that the Chinese telecommunications equipment maker sold Cisco networking gear to Iran.” What’s more, Cisco spokesman John Earnhardt issued the following unambiguous statement to Bloomberg: “Cisco has no current relationship with ZTE.”
Then again, the Guardian reported the following day that Cisco had “curtailed” its seven-year partnership with ZTE. So, you know, things change, and perhaps they are changing again.