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Cisco: Small Business, Smart Grid to Drive Growth

Cisco earnings
Cisco will be looking to new market opportunities to help pull itself out of the current economic slowdown. That's the message that Cisco (NASDAQ: CSCO) CEO John Chambers gave to investors during the company's quarterly investor conference call late Wednesday.

While Cisco has historically built its business on the back of strong carrier and enterprise IT sales, Chambers is looking to small business and utilities to help power growth in 2010 and beyond.

That's not to say that Cisco isn't still growing its enterprise and carrier networking business units, however. During the call, Chambers detailed how new product initiatives like the Nexus switch, the ASR services router and the Unified Computing System (UCS) servers are all performing in the marketplace.

But for the moment, small business is one place where Cisco sees a major hot spot.

"We continue to make strong progress in our adjacent small business market, potentially one of the fastest-growing growth opportunities for Cisco," Chambers said. "Our current market share, in most industry analysts' opinion, is in the low double digits, and therefore provides Cisco with an opportunity for growth even if IT spending remains constrained."

Those spending constraints have caused Cisco, like many other major tech vendors, a good deal of pain over the past several quarters. For its 2009 fiscal year, ending June 30, Cisco reported net income of $6.1 billion, or $1.05 per share. That's a 23.8 percent drop from fiscal year 2008, when it earned $8.1 billion. Revenue dropped to $36.1 billion, down from $39.5 billion in the previous fiscal year.

But Chambers said the small business segment could give Cisco a strong boost heading into next year. He added that, in his view, the small business category usually starts buying sooner and more broadly as the general economy recovers.

"We're beginning to see signs of recovery and small businesses are projected to spend over $7 billion on networking technology in 2010," Chambers said. "Over the past year, we have created dedicated teams across all functions to meet the needs of small business customers, and the channel partners to serve them."

Thinking 'smart'

The smart grid -- the plan to revamp the U.S. electrical grid into a more efficient and optimized system for managing and delivering power -- is also a key opportunity on which Cisco aims to capitalize. Cisco has previously stated that it sees billions of dollars of opportunity in helping to provide smart grid technology for utilities and others.

During Cisco's most recent quarter, the company rolled out its Smart Connected Buildings technology. It's a strategy that involves connecting building systems together so they can be controlled and managed for power utilization and efficiency.

"Cisco will lead in defining the end-to-end architecture that will enable our vision of securely managing energy on electrical grids all the way from the generation to consumption in homes and buildings," Chambers said.

Nexus selling well?

Yet the enterprise remains a core Cisco business -- despite reporting that its fiscal 2009 router revenue dropped 27 percent year-over-year, while switching was down approximately 20 percent.

But Chambers sees rays of hope in Cisco's Nexus, the company's next-generation switching technology that debuted in 2008.

Chambers noted that the Nexus 5000 and Nexus 7000 switches both had 100 percent gains in order growth from the third quarter of 2009 to the fourth quarter. Rob Lloyd, executive vice president of worldwide operations at Cisco, chimed in during the call to note that the company now claims nearly 1,000 Nexus customers.

Lloyd also noted that Cisco's Nexus 1000 virtual switch, which was first announced in September 2008, received its first orders during the fourth quarter of Cisco's fiscal 2009 year.

On the services routing side, Chambers reported on the progress of the ASR 1000, which was announced in March 2008, with a development price tag of $250 million.

"The ASR-1000 is off to a great start with over 1,000 customers, of which approximately 220 are service providers," Chambers said. "It is growing year over year in terms of orders at above 80 percent."

On the carrier side, Cisco's biggest router -- the CRS-1 (Carrier Routing System) -- also experienced sizable sales growth, according to Chambers.

"The CRS-1 grew in excess of 25 percent in the quarter, year-over-year, including more multi-chassis sales this year than in all prior years combined," Chambers said.

What about servers?

Cisco's Unified Computing System (UCS) is Cisco's server play for the datacenter, but it's not yet making a big impact on Cisco's bottom line, the company admitted.

The UCS system debuted in March with blade servers and expanded in June to include a new line of rack-mounted servers.

"We are in very good shape in terms of our initial pilots and program," Chambers said when asked about UCS deployments. "Now, we have got to deliver on those and most of the enterprise customers are giving us an opening."

Chambers also gave some direction on when he expects UCS to become a significant part of Cisco's revenue mix.

"I think it will be significant, absolutely, this year," Chambers said. "Probably the second half of the year, when you will begin to see the volumes really come into play on it if we are successful in our initial implementation."