FORTUNE:

Cisco's display of strength

Cisco fell hard, went through a wrenching period of reinvention, and is now stronger than it has ever been, reports Fortune's Rik Kirkland.

By Rik Kirkland, Fortune Magazine

(Fortune Magazine) -- Sipping Diet Coke in a suite at New York's Mandarin Oriental hotel after a day that began with a joint interview with Microsoft CEO Steve Ballmer conducted by PBS's Charlie Rose, followed by a quick march through a luncheon speech, some one-on-ones with the trade press, and a dozen customer meetings, John Chambers doesn't look or act the way you or I would - exhausted.

As the shadows lengthen over the Hudson River, Cisco's ever ebullient 58-year-old CEO is just getting warmed up. "This is the most excited I've been in ten years," he'd said earlier during his taping with Charlie and Steve. Now in his soft, 90-mph drawl he's explaining why: "I believe a new wave of innovation is coming that will make the first wave of the Internet seem small."

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Beam me up: Chambers (front) wanted Cisco's telepresence product to be 'like Star Trek.' Here he's in D.C.; behind him are key execs in San Jose (from left): Charlie Giancarlo, Sue Bostrom and Marthin De Beer.
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Team player: Holland is both treasurer and a co-head of Cisco's sports effort.
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Telecommuter: From his home in Bangalore, Elfrink talks to fellow brass back home.
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Connected: Proctor runs Cisco's collaboration technology business.

My, that does sound exciting. Example? "This will shock you," he says, leaning forward. "The other day I started the morning with my top staff in India. Then I went to Japan and a meeting with Fujitsu, then on to Cleveland, then London and a meeting with BT. The whole trip took only 3 1/2 hours, and I was far more effective in the calls."

The reason: Chambers was traveling, of course, over Cisco's latest gee-whiz product: telepresence, a high-def, life-sized, Internet-based communications system that is to traditional video-conferencing what the latest big-screen surround-sound plasma extravaganza would be to Grandma's black-and-white set with rabbit ears. "When I asked the team to design this," he recalls, "I said, 'Make it like Star Trek. You know, Beam me up, Scotty.'"

Giving companies the ability to beam the CFO into meetings or link virtual teams of engineers across the globe already looks like a winner. Telepresence, notes Marthin De Beer, senior vice president in charge of Cisco's emerging technologies group, is "our fastest-ramping internally developed new business in history."

But it's just one part of Chambers' strategy to ensure that as video, voice, and data converge on the Internet and at the same time go mobile, Cisco is selling one-click solutions that tie it all together. "Unified communications" is the buzzword for the fast-growing corporate piece of this puzzle - a piece that Microsoft also wants. But Cisco's ambitions don't stop there. In "the next big market transition," which Chambers believes is fast unfolding, the Internet will become the delivery medium of all communications - and eventually everything from security systems and entertainment to health care and education. Essentially, Cisco wants to be the world's biggest tech company, period - hardware, software, services, everything. "My biggest challenge is not growth but how well we prioritize," he says.

Let's pause to acknowledge that not everyone buys this vision. "When I heard a few weeks ago that John Chambers was excited again, I got excited too," says Fred Hickey, author of a respected tech stock newsletter. "I said to myself, 'The end must be near!'" Hickey isn't singling out Chambers. Like other tech bears, he simply doubts that talking up potent concepts - "video as the killer app" or the rise of "the network as platform" - will boost Cisco's stock, not to mention higher fliers like Google (Charts, Fortune 500) and Apple (Charts, Fortune 500), once the recession that he believes is coming pushes consumer and corporate spending off a cliff. Hickey also hasn't forgotten Chambers' role as the pied piper of the last tech bubble, in particular his insistence, as the carnage mounted, that Cisco could continue to grow at a 30% to 50% annual clip. It couldn't.

Chambers doesn't deny that a downturn in the economy would be "a hurdle." But one reason his exuberance remains irrepressible is that "this is a movie we've seen before." He's not referring to the horror show at the turn of the millennium but to a less frenzied era - the early to mid-1990s. Back then Cisco famously pioneered using the Internet for automation - it closed its financial books in record time, did remote manufacturing, and so forth. That success helped persuade customers to buy tons of routers and switches in hopes that they too could strike gold. Chambers wants Cisco to serve as its own best sales tool once again, this time by becoming among the first to master a new generation of collaborative technologies - telepresence, unified communications, and corporate versions of social networks like Facebook and MySpace - and then use them to deliver an even bigger productivity payoff. Only now, he says, Cisco (Charts, Fortune 500) will be able to do "in one year what took us four years in the first movie."

Cisco dazzled Wall Street a few months back when it reported its numbers. Sales jumped 23%, to nearly $35 billion, while profits climbed 31%, to $7.3 billion. Setting aside the growth generated by acquisitions, including its $6.9 billion purchase of cable set-top box maker Scientific Atlanta, its biggest deal ever, revenues still rose 17% - not bad for an outfit that by now should be subject to the law of large numbers. Chambers reinforced the hope that Cisco can keep defying that law by raising his guidance for future sales increases from the 10% to 15% range to 12% to 17%.

The organization posting those fine numbers, however, is very different from the growth monster that briefly (two days in spring 2000) held the title of World's Most Valuable Company. Think of the company from its IPO in 1990 to 2000 as Cisco 1.0, and the company from 2001 to 2006 as Cisco 2.0.

Cisco 1.0 was a two-hit wonder: It sold routers and switches to FORTUNE 500 companies and made rapid-fire acquisitions to scoop up technology it needed. Cisco 2.0 built a more diversified customer base (cable companies, telcos, smaller businesses along with the big boys) and a much broader range of products, many of which it developed internally - IP telephones, data storage, digital media, and, to use a favored Chambers-ism, "end-to-end-architected solutions" (which sounds like "Indian-architected solutions" when he says it). Version 1.0 was a "plumbing" company called Cisco Systems and invisible to the public beyond its high-wattage stock; in the 2.0 phase it dropped the "Systems" and became just Cisco, and started doing product placements in hit TV show's like Fox's 24. (Whenever the President yells at the Russians? Cisco telepresence.)

The roots of all this were planted in the dark winter of 2001. Once Chambers and his team faced what hit them, they moved with alacrity, laying off 8,500 employees and taking a $2.2 billion write-off. They also asked tough questions about where they'd gone wrong. The conclusion was obvious but difficult to implement: Cisco had to innovate faster.

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Market indexes are shown in real time, except for the DJIA, which is delayed by two minutes. All times are ET. Disclaimer LIBOR Warning: Neither BBA Enterprises Limited, nor the BBA LIBOR Contributor Banks, nor Reuters, can be held liable for any irregularity or inaccuracy of BBA LIBOR. Disclaimer. Morningstar: © 2014 Morningstar, Inc. All Rights Reserved. Disclaimer The Dow Jones IndexesSM are proprietary to and distributed by Dow Jones & Company, Inc. and have been licensed for use. All content of the Dow Jones IndexesSM © 2014 is proprietary to Dow Jones & Company, Inc. Chicago Mercantile Association. The market data is the property of Chicago Mercantile Exchange Inc. and its licensors. All rights reserved. FactSet Research Systems Inc. 2014. All rights reserved. Most stock quote data provided by BATS.