Cisco's stock soars to a 7-year high as the company's turnaround takes hold


John Chambers


Cisco CEO John Chambers speaks to the troops

For years, Cisco CEO John Chambers has said he's got a plan to counter the increasing competition in the company's bread-and-butter market of computer network equipment. And on Wednesday, he delivered the first proof that his plan is working.


That sent analysts into a bullish frenzy, with at least 12 of them upping their price targets for the stock.

The stock hit a 7-year high on Thursday, of $29.58, and is comfortably trading above $29, up by about 8%.

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Chambers has been trying to convert Cisco from a one-trick pony - the biggest player in the network equipment industry - to an all around IT company, similar to an HP and IBM. The company also sells computer servers (a product called UCS), security software, collaboration software, equipment for wireless networks. All of those areas saw growth last quarter.


Cisco also grew its bread-and-butter network equipment business (switches and routers), especially the Nexus 9000, which is Cisco's fastest most powerful router. If customers buy special software for it, called Application Centric Infrastructure (ACI), they can use the switch to set up a "software-defined network," or SDN.

An SDN is a network that takes fancy features out of the hardware and puts them into software so network administrators can easily add network equipment or move it around. That's important for building a cloud computing data centers, a big trend.

A bunch of startups, as well as Cisco's partner-turned-rival VMware, sell SDN equipment and are trying to eat Cisco's lunch.

However, Cisco says it now has 1,700 customers for the Nexus 9000, more than triple the customers it had for that product two quarters ago, and 300 of them bought Cisco's special SDN software.

CEO John Chambers all but declared the war won, claiming his competitor's products were nothing more than a PowerPoint presentation. He told analysts on the quarterly conference call,


We are pulling away from our competitors and leading in both the SDN thought leadership and customer implementations. The market has recognized the benefit of ACI as compared to PowerPoint concepts of aspirational competitors.

He also vowed to beat those SDN competitors, calling VMware out by name, and hinted that Cisco will "crush" Facebook-style networks. Facebook has been openly building its own SDN network, freely giving away the hardware specifications and software, and calling on others to join it.

Some analysts were really bullish about Cisco's future, like Alex Kurtz from Sterne Agee, who raised his target to $31.

Kurtz wrote in a research note:

Taking a longer-term view on the Cisco thesis, with strategic changes underway at IBM and HP we see new opportunities in the Storage market as UCS matures; Cisco appears in incrementally better shape to determine its longer-term growth rates along with lessening concerns on SDN impact as Nexus 9K/ACI continues to show solid adoption.


Others, however, were not so impressed. JP Morgan's Rod Hall reiterated an "underweight" rating on the stock, and a price target of $17, writing, "We continue to believe commoditization is coming."

In any case, investors are happy right now. Cisco said it expects to grow revenues 3% to 5% next quarter (in line with expectations), and non-GAAP earnings per share to be $0.51 to $0.53) also in-line with expectations).

Chambers also declared that the company's years of restructuring, culminating with a reorg last fall that affected 40% of its workforce and replaced 30% of its managers, was all-but-over.

Cisco has had four years of layoffs in a row. At the end of the last one, COO Gary Moore told employees that annual layoffs were not the best way to manage its workforce.

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