Chambers Puts Cisco's Plan Back in Spotlight

Cisco (CSCO) shares eased off a year-and-a-half high Wednesday as investors mulled over CEO John Chambers' observations about healthy August sales totals.

The stock jumped 5% early after Chambers -- speaking at a SG Cowen investment conference in Boston -- said that "August was a little bit above our expectations." The chipper chief added that the order strength witnessed in the past quarter seems to be continuing into what is typically Cisco's weakest period.

A little optimism from Chambers goes a long way with tech investors who eagerly await a spending recovery after three years of declines. Still, there's no clear evidence that an uptick is at hand, as the executive noted. Referring to global business leaders, Chambers said: "They've taken their foot off the brake," but they haven't put it "on the gas pedal yet."

Skeptics were also quick to point out that what Chambers sees in the rearview mirror isn't always predictive of what's ahead, either for Cisco or the tech equipment industry. Cisco closed up 3% at $20.26.

The economy aside, investors and analysts have been concerned about Cisco's sharp strategic detour, which last quarter took it through the consumer electronics market via the acquisition of home and small office networking gearmaker Linksys. Some fear that in Cisco's attempts to find new areas of growth, it may have landed in a highly competitive business prone to price battles.

Cisco dominates the Internet switch and router markets. Ruling this empire means Cisco commands high prices and tremendous 70% gross margins for the essential networking gear that runs most of the world's computer systems. Outfits like Juniper (JNPR), Extreme (EXTR) and Foundry (FDRY) have carved out their own smaller pieces of the market, but none have approached Cisco's success.

Outside its gated community, Cisco faces several challenges, particularly in the new super-competitive markets like home networking.

Chambers acknowledged the intensity of the markets and lower margins available there. But he said Cisco encountered the same pressures when it moved into the switching business.

He said that the company went into switching with 40% margins and eventually increased them to 60%. Still, it remains to be seen if Cisco can perform the same feat in the consumer market.

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