Will Cisco's Chambers Stretch the Innovation Envelope?

SAN JOSE, Calif. ( TheStreet) -- Cisco ( CSCO) may have paid a heavy price for its bold push into consumer video, but the networking giant can still drive innovation in its core markets, according to experts.

The tech bellwether, which reports first-quarter results after the markets close on Wednesday, is slowly emerging from a major restructuring effort, which involved ditching the Flip video camera, layoffs, and a massive revamp of its management, sales, services and engineering.

Cisco, led by John Chambers, can still drive innovation, say analysts.

Already, though, analysts are wondering where Cisco CEO John Chambers will stretch the company's innovation envelope.

"I think that Cisco will move ahead by pressing additional 'intelligence' into next-generation network and fabric solutions," explained Charles King, principal analyst of tech research firm Pund-IT. "This is total speculation on my part, but we have seen lots of pieces of this come up over the last few years, whereby Cisco could build server and storage capabilities into network switches."

Specifically, King points to Cisco's VCE partnership with storage maker EMC ( EMC) and its VMware ( VMW) subsidiary as evidence of the company's desire to fuse servers, storage and networking. Aimed at firms looking to quickly build out their cloud infrastructure, the pact centers on pre-packaged blocks of hardware and software, dubbed Vblocks.

Turning switches into a sort of Swiss army knife for the data center, however, would be a major leap forward, reducing customers' need to buy additional gear. Inevitably, this would rile server and storage giants such as Hewlett-Packard ( HPQ) and IBM ( IBM).

Brian Marshall of ISI Group agreed that super-switches could be on the agenda for Cisco, but, like King, acknowledged that they could be some time off.

"I think we're going to see notions like this with the advent of Software-Designed Networking (SDN)," explained Marshall, pointing to an emerging technique for managing network data flows through software. " But I think it's going to be years before we see an architectural switch in enterprise infrastructure."

Nonetheless, Marshall pointed to Cisco's healthy track record of innovation such as the controversial Unified Computing System (UCS), which shattered its relationship with long-standing server partner HP.

"Not everything has failed at Cisco," explained the analyst. "They were the first to load servers with a great amount of memory and, out of nowhere, UCS servers have gone on to gain a great chunk of the market."

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During Cisco's recent fiscal fourth quarter, the company's UCS business enjoyed year-over-year growth of 129%, exceeding an order run rate of $1.1 billion. The company also added around 2,000 new UCS customers, bringing its total to 7,400.

It's not just hardware, though, where Cisco is eyeing future upside. Experts, for example, expect the company's revamp to inject a shot of adrenaline elsewhere in its product portfolio.

"Cisco's restructuring efforts are designed to drive more accountability, more focus, and a more rapid pace of innovation," explained Jayson Noland, an analyst at Robert W. Baird, in an email to TheStreet. "Cisco believes that its biggest growth drivers are virtualization -- collaboration and video -- these trends underlie what Cisco calls the 'phase two build-out of the Internet,' which the company believes will drive the next wave of global productivity gains."

Cisco predicts a 9.6% compound annual growth rate in the collaboration market between now and 2013, with the video market growing a massive 18.5%. The data center market, in contrast, is expected to grow at 8%.

Set against this backdrop, collaboration technologies such as WebEx Web conferencing, Quad enterprise networking and TelePresence, a form of high-end video conferencing, will prove key weapons.

In a clear nod to this trend, Cisco already has started to push its TelePresence wares, traditionally aimed at large firms, into medium-sized businesses.

The next big leap for the company, though, will be tying its different collaboration products together, according to ISI Group's Marshall. "I think it's a piecemeal approach today, but if they had more of a unified approach, that would probably generate some revenue synergies and make customers happier as well," he said.

Cisco will update investors on its restructuring when it reports first-quarter results, something which will prove key in delivering future innovation.

"Cisco is quite a bit tougher company than it was six months ago," said Matt Robison, an analyst at Wunderlich Securities. "They have combined the engineering aspects of their routing and switching businesses and they have combined the engineering efforts of their WebEx and collaboration businesses -- those fiefdoms are not there any more."

"My view on Cisco is that they went through a process that's leading to less bureaucracy and more effective operations," he added.

Analysts surveyed by Thomson Reuters expect Cisco to report first-quarter revenue of $11.03 billion, and earnings of 39 cents a share, compared to revenue of $10.75 billion and profit of 42 cents in the prior year's quarter.

--Written by James Rogers in New York.

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