Cisco Finds New Friends, Eyes New Enemies

SAN JOSE, Calif. ( TheStreet) -- Cisco's ( CSCO) attempt to get its house in order pits the networking giant increasingly against tech behemoths IBM ( IBM) and HP ( HPQ), while pushing it closer to the likes of EMC ( EMC), VMware ( VMW) and even Xerox ( XRX).

With Cisco wrestling with problematic switch and public sector businesses, TBR analyst Beau Skonieczny told TheStreet that its fast-growing services division will help lift it out of its funk.

"From the services perspective, Cisco has been driving pretty aggressively," he said, pointing to the firm's recent partnership with Xerox around managed print services, which will intensify competition with print giant HP. "Cisco, with their smart energy solutions and green grid technology will also be pushing more aggressively against IBM," added the analyst.

IBM, with its vast services arm, has been making a song-and-dance about its green offerings for the last few years. Cisco, though, has also been ramping up its efforts in this space, touting, for example, its EnergyWise energy management technology.

With big questions being asked about Cisco's long-term growth strategy, TBR's Skonieczny told TheStreet that its high-margin services business is particularly crucial. "Cisco's efficient use of their services channel partners allows them to offload a lot of their costs so that they can focus on development," he explained. "This has been boosting their services margins."

It is not just services, though, where Cisco will be banging heads with the heavyweights of Silicon Valley. The company's entry into the server market with its UCS technology in 2009 damaged its long-standing partnership with HP, which is now attacking Cisco in its own backyard; networking.

Jayson Noland, an analyst at Robert W. Baird, says that Cisco's ongoing push into the server is also complicating its relationship with IBM.

"Cisco's entry into the server market has created antagonism with its partners HP and IBM, each of which resells over $1 billion in Cisco equipment per year," he wrote, in a note. "These companies may reduce the amount of Cisco infrastructure they resell while enhancing their own networking businesses through partnerships, acquisitions, and internal development."

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The increased competition from former partners could pressure both Cisco's market share and its margins, according to the analyst, although Cisco shows no sign of slowing its UCS momentum.

Cisco grew its UCS customer base by 1,570 to approximately 5,400 during the third quarter, according to CEO John Chambers, during a conference call earlier this week. Product orders for the technology are now at an annualized run rate of $900 million, he said, up from $650 million in the prior quarter.

Chambers was also banging the drum about the firm's partnership with storage giant EMC and virtualization trailblazer VMware during the third-quarter conference call. Aimed at firms looking to quickly build out their cloud infrastructure, the partnership centers on pre-packaged blocks of hardware and software, dubbed Vblocks.

"Our pipeline looks very good," said Chambers, adding that Cisco, VMware and EMC successfully called the transition toward cloud-based systems before it happened.

"Vblock is Cisco's ace in the hole," added Brian Marshall, an analyst at Gleacher & Co., in a note. "Many enterprise customers today are clamoring for Vblock infrastructure packages as a cost effective and simplemethod of adding more capacity in the data center."

The analyst, however, believes that Cisco would be wise to get even closer to EMC and its VMware virtualization subsidiary. "We have long held the belief Cisco needs to merge with EMC at some point for better exposure to enterprise storage trends, ownership of the VMware asset for virtualization, a more robust security offering and a better collection of IT service professionals," he explained.

Cisco's stock was down 7 cents, or 0.38%, to $16.87 on Friday.

--Written by James Rogers in New York.

>To follow the writer on Twitter, go to http://twitter.com/jamesjrogers.

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