John T. Chambers has decided to base his legacy as CEO of Cisco Systems (NASDAQ:CSCO), the top provider of Internet gear, on the cloud, software and services.
The strategy will successfully fend off challenges from smaller rivals headed by Hewlett-Packard Co. (NYSE:HPQ), Juniper Networks Inc. (NASDAQ:JNPR) and China's Huawei Technologies, he said last week. It also should revive the company's diminished earnings machine.
Chambers, 63, CEO of the San Jose, Calif., Internet giant, is already one of the most respected and beloved executives in the technology industry, in part because of his low-key West Virginia demeanor.
Earlier this year, he promoted Executive VP Gary Moore, also 63, to both president and COO, a likely indication that future leadership will pass onto a younger cadre of engineers and proteges. Chambers has built up those ranks rather well.
Under his leadership since 1995, Cisco for a while was the most valuable company, with a market capitalization in 2000 exceeding $550 billion, just edging out Microsoft Corp. (NASDAQ:MSFT). That should be a lesson to the current champion, Apple (NASDAQ:AAPL), whose market capitalization on Friday was $502.8 billion.
Cisco's current market value, though, is a mere $102.9 billion, which is the problem. That's why Chambers, Moore and senior management unwrapped a new strategy to adapt to the Internet and cloud age, making Cisco the top company in the sector once again. The key is reliance on so-called software-defined networks.
In one sense, the new strategy is unique, because the reshaped Cisco is working with partners in semiconductors, like Intel Corp. (NASDAQ:INTC) and LSI Corp. (NYSE:LSI); software partners including Microsoft, Oracle Corp. (NASDAQ:ORCL) and SAP (NYSE:SAP) and management partner Citrix Systems Inc. (NASDAQ:CTXS) to ensure its products are everywhere.
Besides networks, Cisco is targeting the giant data centers that host the cloud and serve enterprises and small business. That's where the company has recorded its fastest revenue and earnings gains in recent quarters, anyway.
In the first quarter ended Oct. 27, data center revenue soared 90 percent to $417 million from the year-earlier period. The trouble is that sector was less than 4 percent of total revenue, which is still dominated by traditional sales of switches and routers.
So adding more software and services borrows from the 19-year-old playbook of IBM, which six months ago initiated a program called PureSystems, which ensures that anything IBM sells a customer will be compatible with any product already on premises.
Chambers in the past has called this “co-optition,” a term he avoided Friday. But it can't hurt in competing in the cloud against vendors like Apple and Amazon.com (NASDAQ:AMZN) that manage closed networks. Amazon's, though is open for outside accounts.
David Ward, Cisco's chief architect for engineering, suggested that with the help of some custom-designed chips, Cisco will have the ability to install all the data networking, software and services capabilities necessary for the data center.
“It's the greatest untapped mine of 'big data' in the operating sector,” he said.
His boss, Cisco Chief Technology Officer Padmasree Warrior, suggested that with its current product line of products that manage data in fixed and wireless networks, voice and video communications and security, a bolder Cisco can add consulting and advisory services.
Warrior, who's now been assigned the job of finding acquisition candidates, said Cisco has plenty of good products now. She didn't specify targets, although the company has nearly $45 billion in cash and investments.
Last month alone, the company announced plans to acquire private Meraki of San Francisco for $1.2 billion, its biggest acquisition since competing the $5 billion takeover of British video services specialist NDS in June. Cisco also paid $141 million for private network specialist Caridien Technologies and another $125 million for private Cloupia, a specialist in data center management.
Meraki, a specialist in cloud data centers, “is exactly the kind of acquisition we'll be trying to make,” as the company picks up its takeover pace, Chambers said.
Chances are, Cisco's market lead, cash and intelligent intentions will pay off.
Shares of Cisco, though, fell 15 cents to $19.33 on Friday. They're up 7 percent this year, compared with 14 percent for the Nasdaq Composite Index.