CISCO GUARDS THE GATES

By JOSHUA COOPER RAMO

There's not much glamour in the Internet router business. The VCR-size boxes that weave computers into networks belong to the realm of techies. Late at night, when corporations sleep, "geek squads"--the human infrastructure of the information age--stuff routers into closets, under desks or anywhere out of sight. It is not a business that produces headlines.

It does, however, produce stock market rockets. Networking stocks have helped push the tech-laden nasdaq exchange to new highs, and Cisco Systems--a networker whose stock has risen more than 12,000% in the past seven years--is the Apollo of the group. Fund managers trip over themselves to predict how high Cisco stock, which closed last week at $67, will be come Thanksgiving (consensus: $85). In the past six weeks the stock is up 50%. Analysts flock to industry conventions to predict a glowing future.

CEO John Chambers, 46, attracts more groupies at trade shows than the Spice Girls on a London street. Says fund manager James Cramer: "Other than Andy Grove, the guys who manage Microsoft and maybe Lou Gerstner, there's no better management than Chambers and Cisco. In any industry." Cisco recently unveiled its latest eye-popping numbers--52% sales growth with gross margins reaching 65%. And the company pulled this off during a wrenching product transition.

Just as Microsoft and Intel achieved exponential growth by riding the revolution that put a computer on millions of desktops, Cisco hopes to dominate the business of connecting those PCs. Cisco's routers and switches, which sort packets of information as they fly through the ether, are the guts of the Net. If you send E-mail from Tokyo to Buenos Aires, odds are it will pass a Cisco router. With close to 70% market share, Cisco owns the horses of the fastest-growing Pony Express in history.

For all its late promise, the firm was born into rather humble circumstances, the brainchild of husband and wife Stanford academics Leonard Bosack and Sandy Lerner, who were merely trying to exchange notes across the university's computer network. While Stanford's mainframes could crush even the most recalcitrant differential equations, they couldn't pass messages. The mainframes spoke a different language from the desktops at the library, and so on. The solution: a wire-stuffed box that performed a kind of simultaneous translation, enabling IBM machines to talk to Digital machines, wife to send grocery list to husband. By 1990, as the first hints of the Internet emerged, the company went public. The founding couple left, while Cisco began its sprint to stardom.

The credit for that record-setting pace goes to Chambers, an energetic West Virginian with a Kalishnikov for a mouth who plays only doubles when he takes to the tennis court, an extension of his desire to make Cisco into a team. Chambers is relentlessly customer focused and prodigiously paranoid. When Cisco loses a big order, Chambers rings the buying CEO to ask how he could improve.

Chambers learned those lessons at IBM and Wang Laboratories, successful companies that staggered under the pressure of growth. At Wang he had to fire 4,000 employees. It left a mark. "Everyone makes the same mistakes," he says. "They get too far from customers and too arrogant."

To avoid that trap, Chambers spends time with his salesmen and scientists. "I think the leader is the lead dog on the dogsled," he explains. "Not the guy on the back with the whip." The approach has bred intense loyalty. Most Cisco managers could leave and get 50% pay raises at the competition. They stay. Says Cramer: "I've never seen a group of people worship a guy like that. They'd walk through fire for him."

They may soon get the chance. Cisco's explosive numbers have not only impressed Wall Street but have also attracted potential rivals. Two of Cisco's biggest challengers--3Com and USRobotics--earlier this spring announced plans to merge. Chambers thinks he can outflank the competition by partnering with giants like Microsoft and offering customers one-stop shopping. In the past 18 months he has acquired nearly a dozen networking firms. Nonetheless, he remains paranoid: "Our biggest competitor two years ago was 20% bigger than us. Today we're 300% bigger than them. Anyone who thinks that can't happen to them is wrong." If the stock market is any indication, no one thinks it will happen to Cisco anytime soon.

--With reporting by Daniel Eisenberg/New York

With reporting by DANIEL EISENBERG/NEW YORK