Cisco Systems Sets New Focus: Software Will Be Key

Cisco Systems Inc. (NASDAQ:CSCO), the No. 1 provider of Internet equipment, will shift its principal focus to software and cloud-oriented technologies, CEO John T. Chambers said Friday.

The new shift is targeted to speed growth and make the company more profitable, Chambers and other top senior executives told financial analysts in New York. The target is for profit growth ranging between 7 percent and 9 percent.

“Organic growth is what we focus on, although there will be some acquisitions,” Chambers said. Over time, the new approach should send the San Jose, Calif., company's reliance on software and services above 50 percent over the next 18 months, Chambers said.

“We're doing extremely well in routing and switching,” Chambers told the analysts. Still, the company wants to tap emerging sectors in the cloud, as well as new opportunities for software, he said.

The approach will also position Cisco for the era of so-called "big data," Chambers said. "Where do you think all the data come from? They're all distributed throughout the network in switches and routers, where we are already."

The announcement also could signal that Chambers, 63, may be looking to step down soon, but not before Cisco is left on a strong financial footing. Cisco shares have gained 8 percent in 2012 but only 2.6 percent over the past 52 weeks.

Chambers has been Cisco's CEO since January 1995.

“We have a focus on profitability and leadership value in each area of our product organization,” Chambers said. He said there will be more coordination and consolidation among the company's operating unit.

“There will be more acquisitions in the software area, cloud and other areas where we want to grow,” Chambers explained.

He said the focus on services should allow Cisco to compete better against its Internet peers but also become more nimble competing against some companies that may have already moved into software-defined networks.

Some private companies, such as Nicera, have been acquired by rivals such as VMware (NYSE:VMW), while others, such as private Cloudera, have just announced major new infusions of venture capital.

During a question period, Chambers acknowledged some of the new strategy was a response to earlier makeovers by International Business Machines Corp. (NYSE:IBM) as well as recent moves by Oracle Corp. (NASDAQ:ORCL) and Microsoft Corp. (NASDAQ:MSFT).

The Cisco CEO said the company will keep partnerships with IBM, Oracle and Microsoft as well as with Germany's SAP (NYSE:SAP) but was especially targeting Hewlett-Packard Co. (NYSE:HPQ), the No. 1 computer company.

“This is a market in transition and the role of the network is going to take a big role,” he said.

Last week, Cisco announced plans to acquire private Meraki, a cloud-based software company in San Francisco. “That deal is 100 percent software,” Chambers said.

Cisco previously reported first-quarter net income rose 18 percent to $2.1 billion, or 39 cents a share, as revenue rose 6 percent to $11.9 billion.

Cisco shares fell 17 cents to $19.31 during the meeting, which continued until early afternoon, but recovered slightly to close down 15 cents at $19.33. They've gained 7 percent in 2012.