Cisco appears to have continued its recovery following a painful restructuring. Sales are up and setting records, earnings beat the consensus of analysts, and Cisco’s outlook for the coming quarter is positive, too. Cisco’s even reached a point where it’s at least close to fitting into its old skinny jeans. What a difference a year makes. Last year it was all about gloom and doom and some irritable investors were calling for Chambers to lose his job.

Since then the company has undergone a painful but necessary restructuring, shed thousands of jobs, shut down marginal business units and refocused on its core businesses, and as yesterday’s quarterly earnings report proved, the results are not only starting to show, but starting to stick.

So is the work done? Definitely not. Yes, Cisco is showing some return to its strengths, but there’s still a long way to go. We talked about that, the troubles Cisco’s competitors are facing, his long-held view that companies like Cisco should get a tax holiday to repatriate their cash held outside the U.S. and many other things.

Also Chambers, remembering that I dedicated “How Ya Like Me Now” to Cisco last quarter as it turned the corner on its troubles, asked me what song I might use to characterize its results this quarter. Taking inspiration from the headline of my first story and from his cautiously optimistic tone, I settled on “It’s Getting Better All The Time,” the Beatles track, performed by Paul McCartney and embedded after the Q&A. Enjoy.

AllThingsD: John, I don’t know if you saw the headline I wrote earlier, but I said you fit into your skinny jeans again. Is that fair?

John Chambers: [Laughs] I think it’s fair. We were up about four or five inches there so I think we have an inch or two to go, but we’re getting close.

So let me ask about the quarter. It looks like a solid quarter where a lot of the troubles were starting to get behind you. In broad brush strokes, where were Cisco’s strengths? I know some of your competitors were having their own troubles, but where were you strong in particular?

The strengths were that we appear to be executing on the market transitions that are going on, and we appear to be reinventing ourselves, not just in terms of how we control our costs, but in terms of the productivity we’re getting out of our employees. So if you look at the major transitions going on in the industry from an economic point of view, to how customers buy, to where the high tech industry is going, which I would argue is all connected to intelligent networks, that all appears to be playing out as we had hoped. The other transitions that you think about, like data centers and the cloud, we saw 90 percent growth in an industry that is growing at best in the teens. Our ability to move in collaboration, where we grew 10 percent though I think we could do better — it remained solid for us. In video with set-top boxes up 23 percent to new video technologies growing well and seeing improvement in the margins. There are things we need to do to reinvent Cisco. I think I said this at your own conference a decade ago [Chambers spoke at D5 in 2007, but that is not where he made this comment. -Ed.] that voice will be free. It’s almost there. You could see the trend, and what it meant is that once voice would become a smaller part of the network load, that would be given away in order to make way for the video and the entertainment. The same trends are taking place all over again at multiple speeds and multiple gears, which if we’re right, they all play together. Everything from mobility to cloud to the intelligent network, to wireless to security, to video being pervasive, all of those are coming together at tremendous speed. And we’re pulling them all together pretty well for our customers. Now, this is just the beginning if we execute right, and we have plenty of hurdles in front of us, but this may be the voice-will-be-free trend times 10 in terms of the impact of the transitions going on. We appear to have managed them well; we did what we said we would do, turned in record earnings and record revenues, and earnings per share were up 48 percent. We’ve realigned ourselves and reinvented the company, which I think you have to do every five years. Sometimes it takes a crisis to reinvent. … It’s a journey and we’re just getting started.

What’s the number one hurdle that you want to get over this year, that’s in front of you right now and keeping you up at night?

I want to build deeply into our capabilities, a continued focus on gross margins and effectiveness, from product design to sales all integrated together. You probably know this, but we’re the only company who’s anywhere near this profitable with $45 billion in sales with open standards. It isn’t a mainframe business where everything is proprietary or like in Apple’s situation where it’s a wonderful company but it has an architecture. We do it entirely with open IP, so we can be challenged by a 10-person start-up or a by the biggest giants like Dell or IBM or Hewlett-Packard to come at us. With this type of margin but so low a barrier to entry, we’re doing relatively well. But we still have to reinvent ourselves at a faster pace. We have to do what I call the basic blocking and tackling to participate in the new capitalism that we’re heading into. That’s the attention to gross margins, getting the market transitions right, tying the products together so you can get the price premium on them. But what really keeps me up at night this last year was the realization that this has to be constant reinvention. Average is over. An average high-tech company is headed down. Those above-average companies are going to head down in 3 to 5 years. If as a company you can’t reinvent yourself every 3 to 5 years, you have a problem coming at you.

Does that then imply that Cisco had become complacent or even average? It was and is the biggest networking player, but did Cisco lose its way and try to do too much?

Well, I could give you a long list of things we have to do better. We’re a healthily paranoid company so we always have things we could do better. I do think we were fat. Four to five inches, not just one or two. We’re not back in our skinny jeans yet, as you put it, but we’re within an inch or so of getting there. We missed market transitions at the speed at which they occurred. We should have seen the drop-off in public spending coming at us sooner. Everyone else has still run off the turn, even though they saw what happened to us two to four quarters ago. We should have seen it sooner and reinvented ourselves before it hit us, and made the turn much more effectively, and I’m committed to doing that, and the leadership team is, too. It would have been easy to just cut a billion dollars in expenses, reorganize sales and how customers buy. We realized that gross margins can deteriorate not just because of what competitors do but what we do to ourselves, like what we did on switching. We should have been smarter there.

On the conference call you mentioned the possibility of getting back into the mergers and acquisitions game. Any hints on where you might go or whom you might buy?

I think it’s a fair question. Part of the reason we said that was to explain why we’re building up cash in the U.S. Part of it was for share buybacks because the price was attractive. A lot of people don’t realize that we use M&A deals to gain leadership. We were a routing company, we acquired three switching companies. We were an enterprise and commercial company, we acquired a service provider company in Stratacom. If you look at where it’s going to be, it’s probably in data center, collaboration and video, and combining those with security, bring your own device and mobility. A large part has to do with our government allowing us to bring money back to our country.

That’s always been a big issue of yours. You made some comments about it on the conference call as well. Care to elaborate?

I think that it’s going to happen in the next presidential administration whether the president is re-elected or someone else is. I’ve been disappointed that we haven’t been able to get our message out about this more effectively. Ironically, I was in Europe, the government leaders there look you right in the eye and ask what they need to do to bring jobs to their country and keep the ones they have. They are partnering with business. I think we’re following Europe in the wrong way and following more of what they did to get them in trouble in the first place.

There’s a bit of a disconnect, however, to anyone who sees on one hand a company that wants to bring cash back in a tax-advantageous manner in the name of creating jobs, while the same company just fired so many people in the restructuring. Can you connect those dots for the person who sees the apparent logical disconnect? If it’s about jobs, then why are you firing people in the first place? If you were having lunch with President Obama or any other political leader, they might be confused, so how do you explain it?

They’re related. The first thing you’ve got to do when you hit bumps in the market is find out how much of the damage was self-inflicted and how much was the result of the conditions of the market. It would be a cop-out to say it was all the general market. We had to look at what we were doing internally. Every government leader in the world who’s adding to government payrolls and adding government debt is going in the wrong direction. We have to use technology to deliver services better. You do see most government leaders saying they want to get their own houses in order. The second thing they do is look at ways to generate private sector jobs. I’m a strong Republican, but I think President Clinton got it right with business and knocked the ball out of the park. He partnered with business, he was critical where appropriate, but in six years he generated 22 million jobs, grew GDP on average by 4 percent per year, and he was America’s champion on the Internet. I think that’s a more practical example. He grew private sector employment versus government employment by a ratio of 9 to 1, and created a positive climate for business, and when business got out of line he’d whack ’em. I think it would be a major mistake not to let companies repatriate their cash because whoever is in the Oval Office next year is going to want to get private sector jobs growing again, and there really aren’t very many levers left to pull. We’ve never had this slow a recovery after this deep a recession.
–

Getting Better – Paul McCartney

“We are executing well on our three-year plan to drive earnings faster than revenue. Our operational focus continues to yield positive results — we hit our billion dollar expense reduction a quarter early — and our ongoing innovation enables our customers to solve their critical business needs,” was how CEO John Chambers put it in a statement.

I’m listening to the conference call, and will have a few more highlights. First there’s the guidance for the quarter ahead. Chambers and CFO Frank Calderoni said the company expects revenue to grow in a range between 5 percent and 7 percent year on year, which works out to sales of $11.4 billion to $11.6 billion, which beats the current consensus outlook. Calderoni also said Cisco expects to earn 45 cents to 47 cents a share, the higher of which is two cents higher than the consensus estimate of analysts. Expect some upgrades from analysts tomorrow on that news alone. Gross margins, Calderoni said, are expected to come in between 61.5 percent and 62 percent, which is also a bit higher than the 61.2 percent margin seen this quarter.

During his prepared comments, Chambers also said that while Cisco has been holding back on doing mergers and acquisitions, that may be coming to an end. “We will be more active with mergers and acquisitions in the quarters and years to come,” he said.

Another interesting stat: Chambers said productivity per employee rose 20 percent to $724,000. That tends to happen when the overall number of employees drops — which it has by about 6,500 over the last six months or so. But it’s also an indication that Cisco had some serious operational fat to trim.

The profit was better than the 43 cents that analysts had forecast, while sales were about $200 million better than the $11.23 billion consensus estimate. Cisco shares, which traded higher by nearly 1 percent during the regular session, rose by almost 4 percent to $21.07 by 4:10 pm ET in after-hours trading.

The earnings report also marks another step in the turnaround that CEO John Chambers ordered last year as the company’s outlook started to fall short and its growth prospects sputtered.

Cisco’s press release is below, and its conference call with analysts begins shortly, which is where we’ll hear the crucial forward guidance. I’ll add more to the post as Cisco adds color to the results during the call.

Cisco Reports Second Quarter Earnings

Increases Quarterly Cash Dividend to $0.08 per Common Share

SAN JOSE, CA–(Marketwire -02/08/12)- Cisco (NASDAQ: CSCO – News)

Q2 Net Sales: $11.5 billion (increase of 11% year over year)
Q2 Net Income: $2.2 billion GAAP; $2.6 billion non-GAAP
Q2 Earnings per Share: $0.40 GAAP (increase of 48% year over year); $0.47 non-GAAP (increase of 27% year over year)

Cisco, the worldwide leader in networking that transforms how people connect, communicate and collaborate, today reported its second quarter results for the period ended January 28, 2012. Cisco reported second quarter net sales of $11.5 billion, net income on a generally accepted accounting principles (GAAP) basis of $2.2 billion or $0.40 per share, and non-GAAP net income of $2.6 billion or $0.47 per share.

“We delivered strong performance this quarter with record revenue and earnings per share,” said John Chambers, Cisco chairman and CEO. “We are executing well on our three-year plan to drive earnings faster than revenue. Our operational focus continues to yield positive results — we hit our billion dollar expense reduction a quarter early — and our ongoing innovation enables our customers to solve their critical business needs. You will continue to see a focused and aggressive Cisco that is helping our customers use intelligent networks to transform their businesses.”

GAAP Results

Q2 2012 Q2 2011 Vs. Q2 2011
————– ————– ———–
Net Sales $ 11.5 billion $ 10.4 billion 10.8 %
Net Income $ 2.2 billion $ 1.5 billion 43.5 %
Earnings per Share $ 0.40 $ 0.27 48.1 %

Non-GAAP Results

Q2 2012 Q2 2011 Vs. Q2 2011
————– ————– ———–
Net Income $ 2.6 billion $ 2.1 billion 23.3 %
Earnings per Share $ 0.47 $ 0.37 27.0 %

Net sales for the first six months of fiscal 2012 were $22.8 billion, compared with $21.2 billion for the first six months of fiscal 2011. Net income for the first six months of fiscal 2012, on a GAAP basis, was $4.0 billion or $0.73 per share, compared with $3.5 billion or $0.61 per share for the first six months of fiscal 2011. Non-GAAP net income for the first six months of fiscal 2012 was $4.9 billion or $0.90 per share, compared with $4.5 billion or $0.80 per share for the first six months of fiscal 2011.

A reconciliation between net income on a GAAP basis and non-GAAP net income is provided in the table on page 5.

Cisco will discuss second quarter results and business outlook on a conference call and webcast at 1:30 p.m. Pacific Time today. Call information and related charts are available at http://investor.cisco.com.

Cisco Increases Quarterly Cash Dividend

Cisco also announced that on February 7, 2012 its Board of Directors declared a quarterly dividend of $0.08 per common share, a two-cent increase over the previous quarter’s dividend, to be paid on April 25, 2012 to all shareholders of record as of the close of business on April 5, 2012. Future dividends will be subject to Board approval.

“We’ve consistently reiterated our commitment to using the cash generated in our business to drive shareholder value, and to do so with a combination of stock repurchases, dividends, M&A and R&D,” said Frank Calderoni, Cisco chief financial officer. “This quarter, with the strength of our business, we’re pleased to announce an increase in our dividend. Going forward, we will continue to focus on driving the greatest return for our investors.”

Other Financial Highlights

Cash flows from operations were $3.1 billion for the second quarter of fiscal 2012, compared with $2.3 billion for the first quarter of fiscal 2012, and compared with $2.6 billion for the second quarter of fiscal 2011.
Cash and cash equivalents and investments were $46.7 billion at the end of the second quarter of fiscal 2012, compared with $44.4 billion at the end of the first quarter of fiscal 2012, and compared with $44.6 billion at the end of fiscal 2011.
During the second quarter of fiscal 2012, Cisco repurchased 26 million shares of common stock under the stock repurchase program at an average price of $17.84 per share for an aggregate purchase price of $466 million. As of January 28, 2012, Cisco had repurchased and retired 3.6 billion shares of Cisco common stock at an average price of $20.47 per share for an aggregate purchase price of approximately $73.8 billion since the inception of the stock repurchase program. The remaining authorized amount for stock repurchases under this program is approximately $8.2 billion with no termination date. During the second quarter of fiscal 2012, Cisco also paid a cash dividend of $0.06, or $322 million.
Days sales outstanding in accounts receivable (DSO) at the end of the second quarter of fiscal 2012 were 31 days, compared with 35 days at the end of the first quarter of fiscal 2012, and compared with 40 days at the end of the second quarter of fiscal 2011.
Inventory turns on a GAAP basis were 11.1 in the second quarter of fiscal 2012, compared with 11.2 in the first quarter of fiscal 2012, and compared with 10.6 in the second quarter of fiscal 2011. Non-GAAP inventory turns were 10.8 in the second quarter of fiscal 2012, compared with 10.9 in the first quarter of fiscal 2012, and compared with 10.0 in the second quarter of fiscal 2011.

Select Global Business Highlights

Cisco completed its acquisition of privately-held BNI Video, which supplies service providers with two major video products that offer video back-office and content delivery network (CDN) analytic capabilities.
Cisco released its seventh annual Corporate Social Responsibility report which details how Cisco applies its expertise, technology and partnership strategies to address environmental, social and governance issues.

Cisco Innovation

Cisco announced that in just over two years its new Cisco Unified Computing System™ (UCS), which integrates computing, networking, management and virtualization, has captured the attention of data center managers and CIOs alike — to date, over 10,000 customers worldwide, including 3,000 in Europe, have deployed Cisco UCS.
Cisco introduced Cisco CloudVerse®, a framework that combines the foundational elements required to enable organizations to build, manage and connect public, private and hybrid clouds.
Cisco announced that Cisco Videoscape™ will now help enable new “video in the cloud” services that can drive new revenue streams for service providers and exciting new video entertainment experiences for consumers.
Cisco announced the addition of new solutions and services to its Connected Grid portfolio that will help utilities modernize the electric grid with built-in flexibility, security and interoperability enabled by the power of the network. Cisco’s new technology architecture, solutions and related services address key utility concerns around cost, reliability and scalability in their communications infrastructures.
Cisco announced a series of advancements that can give midsize businesses access to “enterprise-grade” IP phone systems with integrated collaboration capabilities without taxing already constrained IT and financial resources.

Select Customer Announcements

Verizon will extend its next-generation 100G capabilities in select U.S. markets, including Atlanta, Boston, Chicago, Dallas, Los Angeles, New York and Seattle, by deploying Cisco’s CRS-3 Carrier Routing System platform to terminate high-speed connections closer to the “edge” — the part of the network nearer to the customer’s network facilities.
Canada’s Woodstock Hospital has chosen a Cisco Medical-Grade Network for its brand new facility, providing a highly resilient, innovative and economical solution to improving health services and advancing patient care.
Cisco Cius™ was part of the Petrobras Gas Station of the Future technology portfolio launched by Petrobras Distribuidora, a subsidiary of Petrobras, and Intel, in Brazil.
Cisco announced that Warsaw’s brand new National Stadium is implementing the Cisco Connected Stadium solution. National Stadium in Poland is one of the venues for next year’s UEFA EURO 2012™ European Football Championship.
MEED Networks in Nigeria is set to deploy a Cisco Borderless Network Architecture at Ahmadu Bello University, the largest university in Nigeria and second largest in Africa.
Telstra and Cisco have enabled members of the Australian Government to meet face-to-face without the need for costly travel, following the successful deployment of one of the largest national telepresence networks in the country, the Australian Government’s National TelePresence System.
Cisco announced that Dutch service provider KPN has chosen the Cisco CRS-3 multi-chassis Carrier Routing System, which will be deployed at the heart of KPN’s Internet peering network.
Cisco and Swisscom are equipping 200 pharmacies in Switzerland with Cisco TelePresence® video communication systems. Launched recently under the name netCare, this two-year pilot project will help enable the provision of advanced telemedicine services.

Cisco’s recent history is peppered with instances of missed quarters that deliver on results but offer poor outlook. After a restructuring that saw the company cut 6,500 jobs, kill its consumer-oriented products, sell off its Mexico-based manufacturing operations to China’s Foxconn and recalibrate its long-term growth expectations with the financial community, the pressure is on Cisco and its CEO John Chambers to show that the changes were not only for the better, but that they’re taking hold.

Cisco is supposedly back in fighting trim. A new ad campaign, coupled with aggressive strategies in new market areas like cloud computing, coupled with a pivot away from unsuccessful consumer products, suggest that the company is back on track. But can the apparent progress made last quarter stick?

Analysts are expecting a profit of 43 cents a share on sales of $11.23 billion. Analyst Sanjiv Wadhwani of Stifel Nicolaus expects the results to come in slightly better than that. Writing in a research note to clients last week, he checked Cisco’s channel and found that sales of switching products, weak in recent quarters, appears on track to better than expected. Router sales appeared stronger versus competitors, specifically Juniper, despite a relatively weak environment for IT spending overall.

Geographically, spending in the U.S. was steady and, surprisingly, so was spending in Europe, except for in southern European countries like Greece and Italy, were the sovereign debt crisis has been so acute.

Weaknesses will be apparent, Wadhwani says, in sales of set-top boxes, suffering, in part, because of the shortage of hard drives as a result of the flooding in Thailand. Gross margins, a key metric of profitability, may be down slightly in part of a large sale of aggressively priced routers to China. One bright spot of note: During the quarter, Cisco announced that its Unified Computing System — its cloud computing hardware offering — has reached 10,000 customers and is, roughly, a $1 billion business.

Wadhwani says he expects Chambers to set a positive tone in his guidance. “As far as orders are concerned, feedback has been generally positive and consequently we expect the company to provide solid guidance for April. We also expect a positive tone from CEO John Chambers with optimism about the U.S. leading the world in an economic recovery.” That would be a nice change from the depressing results announced a year ago.

On Monday, the company is officially taking the wraps off its plans. Nicira — which I’m told is pronounced like “nice era” — aims to be the vendor of a new networking technology that’s built specifically for the age of cloud computing.

One of the most important enabling technologies of the age of the cloud is something called “virtualization”: As computers have gotten more powerful, thanks mainly to the progress of Moore’s law and ever-better chips — a single computer can, with the aid of software like that created by VMware, act like it’s 10 or 20 or 40 different computers, all at once. Each “virtual machine” has, to its user, all the properties of a physical computer, and ensures that a single machine is used in the most efficient and cost-effective way possible. Customers who use cloud services can quickly “spin up” new virtual machines as needed to meet new demands, usually within minutes.

But generally speaking, networking hasn’t kept up. The pipes through which bits pour in and out of data centers have gotten faster, but they haven’t gotten much smarter. Where cloud servers are flexible, precise and easy to manage, networks are, by comparison, blunt instruments. Meeting new demand means adding new capacity, and that usually means adding new hardware to the mix, and that usually takes weeks, if not longer.

If you’ve ever wondered if it were possible to “spin up” a virtual network as readily as you do a virtual machine, wonder no more, for that is precisely what Nicira wants to offer you, without the addition of a single new piece of hardware, but rather only some software that runs on your existing server. You don’t even need to have especially advanced networking hardware.

Its the kind of thing that could give big enterprises some new flexibility in managing their network infrastructure, particularly as need and demand peaks and drops, whether by the day or because of a seasonal change that happens just once a year.

The company already has customers: AT&T, eBay, Fidelity Investments, Rackspace and the Japanese telecom giant NTT are all using Nicira, the company says.

Nicira calls its product an NVP, or network virtualization platform, and it is being described as the sort of advance that comes along perhaps once every quarter-century. That’s a bold claim, but the argument on which the company is making it holds water. On a day-to-day basis, where you deploy an application in a data center is as much a function of how much networking capacity you have available as it is one of computing capacity.

Virtualization on servers allows you to spread a single app over as many physical machines as needed, but the network connecting those machines is what it is, and if it isn’t up to snuff, you can either enhance it by adding new routers and switches, or live with it. The result is that you can’t be as flexible with deploying apps as you’d like, and that certain machines end up being underutilized by as much as one-third, which is costly over time. You end up having to buy more servers, then pay to run them and cool them.

The Nicira NVP, as CEO Stephen Mullaney told me, “decouples” a virtual network from the physical network hardware. “All of the intelligence, all of the control, all of the services now get done in the virtual space.” The result, what was once a dumb networking pipe carrying bits into two different virtual machines running on the same one, can now be programmed to act in vastly different manners, according to rules in the virtual realm. In much the same way a single computer gets turned into a dozen, a single network can be subdivided and act like a dozen individual networks. Or the reverse: Several networks can be cobbled together to act like one. And a virtual network can be created on the fly in minutes, just like a virtual machine.

A network you can deploy in minutes saves a lot of money, because it allows you to move quickly as your networking needs change. Most big companies who demand the heaviest network loads have agreements with their service providers — usually big telecom companies — that a request for new capacity requires a week or more, because it requires the physical presence of technicians who have to install and provision new gear. But what if you can reconfigure your network in 30 seconds to meet the needs of some new application? That’s exactly what eBay’s Cloud Architect JC Martin found he could do after installing Nicira’s software on the company’s servers. EBay is a Nicira reference customer.

Other reference customers had other interesting experiences and uses to report. Japan’s NTT uses cloud data centers to run some 10,000 virtual desktops — think PCs that are all virtual machines — and found that it was easier to quickly switch between data centers during the rolling blackouts that have become the norm since that country’s earthquake last year.

There is, of course, a great deal more technical detail, but the point you have to get is that this company is out to disrupt the networking industry in a way that it hasn’t been disrupted in a long time. The traditional solution to networking problems is more, better, faster hardware, and companies like Cisco, Juniper, and Hewlett-Packard, among others, are constantly on the lookout for opportunities to sell more of that hardware.

But what if you could look a sales rep from one of those companies in the eye, and tell them that their latest million-dollar router or switch isn’t needed? Once upon a time, before the days of virtualization, if you needed a new server, you had to buy one and have it installed somewhere. Now you can, in most cases, rent space on one within minutes, or literally provision another with a few clicks of a mouse. It changed the expectation and much of the calculus of the IT industry. Many companies never buy their own servers at all, and rent space from cloud providers like Amazon, Rackspace and Joyent.

Exactly what a similar disruption might mean for networking vendors is a little hard to imagine, but if the folks at Nicira are right about the potential this technology of theirs has, it looks like that disruption is coming, one way or another.

I’m told Nicira has just made another key hire, again from Cisco Systems. Bruce Davie, a longtime Cisco employee and a Cisco Fellow, has joined Nicira as its Chief Service Provider Architect.

Davie is pretty well known in networking circles, and is one of the co-inventors of MPLS, or multiprotocol label switching, which is a fundamental basis for the high-end business class Internet service that many carriers deliver.

Davie joined Cisco in 1995, and has been a Cisco Fellow since 1998. Since 1997, he has worked in the Internet Technologies Division at Cisco, and leads a group that represents the company before the Internet Engineering Task Force. If there’s anyone who truly understands how the Internet’s pipes really work, he’s probably among them.

Before Cisco, Davie worked at Bellcore, a.k.a. Bell Communications Research, the old research and development arm of the regional phone companies, or “Baby Bells,” that resulted from the 1982 court-ordered breakup of the old AT&T. Bellcore is still around; it eventually became Telcordia and ended up in the hands of Swedish telecom concern Ericsson, in a deal that closed earlier this month.

Davie has a B.E. from Melbourne University, and a Ph.D. in Computer Science from Edinburgh University. He is the author of three books on networking, and lots of technical papers. He is also an active participant on both the Internet Engineering Task Force and the Internet Research Task Force; a senior member of the IEEE; and has, in recent years, been a visiting lecturer at the Massachusetts Institute of Technology.

Davie would appear to be the eighth person at Nicira (by my likely incomplete count) with a Cisco connection. Its CEO is Steve Mullaney, a veteran networking executive who has worked at Palo Alto Networks, ShoreTel and Cisco. Its CTO and co-founder, Martin Casado, did his Ph.D. on the technology the company plans to bring to market. Its other founders, Nick McKeown and Scott Shenker, are electrical engineering profs at Stanford and Berkeley, respectively. Last January, the outfit also hired Rob Enns, a veteran of Juniper Networks, as its VP of engineering.

There’s still no official word about what Nicira is doing, but all these hires are making it look ever more interesting by the day. Nicira is working on technology aimed at “virtualizing the network.” Data center networks today are too inflexible, complex and costly, especially in the age of the cloud, when everything is on-demand, flexible and cheap. Nicira’s Web site says the product is a software solution that runs on existing networks, requires no new hardware and is aimed directly at large-scale cloud data centers. Interesting, indeed.

The spot depicts a batch of assembly-line robots busily building cars, as an instrumental version of the 1979 Gary Numan hit “Cars” plays happily. All is well until one of the robots experiences trouble and complains to the others, “I’m broken.” No problem, one of the others says, fixes his stricken comrade, and all is again well. Cue the voice-over, saying something about assembly lines that repair themselves. Then cue the corporate logo, aaaand … out.

The spot — which has exactly 100 percent less Ellen Page than the last series of Cisco TV ads — is part of a significant new advertising offensive that Cisco is launching today on television, in print and online. The TV spots will appear during the NCAA basketball games, the National Hockey League’s All-Star Skills Competition, and on CNBC and other business-oriented programming. However, it notably won’t appear during the Super Bowl.

Those robots will be seen again, disassembling and reassembling sections of certain Web sites as part of a series of “site takeovers,” including CNBC and The Street, among others.

The print portion is a six-page “manifesto” that explains ways that Cisco’s “Human Network” plays important and unexpected roles at banking companies and companies that sell chutney, and helps the National Basketball Association push its video around the world. The manifesto will appear in The Wall Street Journal (which, like this Web site, is owned by News Corp.), the Economist and the New York Times.

There will also be a social campaign via LinkedIn that goes after 140,000 C-level executives registered on that network. It will be the first time that embedded video will be used in a LinkedIn campaign. More TV ads will come later this year, as will localized versions of the campaign for international markets.

Last week, I talked with Blair Christie, Cisco’s chief marketing officer, who said that the manifesto in particular is about using the voice of its customers to show how Cisco’s technology can help companies do things they couldn’t do before. Of course, the point they’re supposed to get is that a Cisco intelligent network is what’s enabling them to do that.

Christie says it’s all part of Cisco’s effort to simplify how it communicates about itself. There’s no more muddling of the message. There’s no more consumer division to eat into the perception that Cisco is anything but an enterprise- and service-provider-focused networking company, so no more need for cute ads that overdo awkward jokes about teleconferencing, or showing a giggly twentysomething woman in a virtual fitting room. Cisco is now about transforming how companies do what they do, either by doing it better, or seeing new opportunities. It’s a big message, and a tricky one to get across in 30 seconds during a football game.

I asked Christie about the state of Cisco’s brand before this campaign, and whether or not there were any perceived weaknesses, given its recent troubles, that this ad effort is meant to shore up. “There was actually a lot that was right with our brand,” she told me. “The opportunity we had was clear and simple. Our customer voice is our talent, and that’s what we’re showing, and it’s consistent with our strategy. We use our customers as a test bed, so why not use them as a reflection of our brand? It wasn’t rocket science. But it was the customer voice that was missing.”

Simplifying and streamlining are themes that Cisco is certainly acquainted with of late. It has been doing a lot of those, and indeed, even shrinking itself as part of a broad-based restructuring. The results of that effort are starting to show up in Cisco’s results.

Time will tell if this new advertising campaign will help Cisco effectively reintroduce itself to its core customers; fight off strong competitive thrusts from the likes of Hewlett-Packard, whose networking division marketed itself aggressively against Cisco in 2010; and perhaps press a perceived advantage against Juniper Networks, which has been having its own problems.

What I find notable, or maybe missing from the campaign, are recognizable names of customers doing innovative things. Yes, there’s the NBA, but in the print manifesto, who’s the bank that’s using Cisco’s video TelePresence to interact with customers? Who’s the small chutney company that turned “browsers into buyers”? And who’s the car company with such smart assembly-line robots? It’s a good message that, to my mind, could be made a lot more effective with more specific examples.

And while I grant it’s often difficult to get customers to agree to be named in ads like this — you could almost hear CEO John Chambers’s frustration about not being allowed to name a certain banking customer, about which he was obviously proud, on a recent conference call — the biggest networking company in the world shouldn’t have such a problem. It should be able to brag that this or that household-name bank is an enthusiastic Cisco customer, and that Cisco networks powered the manufacturing of that popular car everyone is talking about right now. That would add some real oomph, and really serve to remind potential customers that Cisco is still, despite its recent missteps, the networking world’s alpha dog.

Anyhow, my critique aside, here’s the robots spot. Enjoy:

Cisco Robots from Arik Hesseldahl on Vimeo.

The new forecast calls for companies and governments to spend a combined $3.8 trillion on information technology, which would amount to growth of 3.7 percent from 2011. The previous forecast had called for growth of 4.6 percent.

For perspective, the difference on a dollar basis is about $100 billion, which is certainly real money, but when you consider the various puts and takes affecting the projected spend, it makes a certain amount of sense.

Gartner says that all four of the major technology sectors it tracks — computing hardware, enterprise software, IT services, and telecom equipment and services — will see their growth rates slow this year.

You can probably guess why: The uncertain global economy, the euro zone sovereign debt crisis and the disruptions on the hardware supply chain from last year’s flooding in Thailand on hard-drive production have all teamed up to perform a triple whammy on the tech sector. The Thailand problem will probably last until well into 2013, Gartner’s Richard Gordon says in a statement, echoing what Seagate CEO Steve Luczo told AllThingsD in an interview in November.

Telecom equipment spending will probably suffer the least, Gartner says. Sales in that sector will grow by nearly 7 percent to $475 billion, followed by the enterprise software market, which will grow by 6.4 percent to $285 billion. The chart at the right, which I screengrabbed from Gartner’s handout, breaks down the revised outlook by each sector versus what the previous growth outlook had been.

Gartner also trimmed its average annual growth projection for IT spending through 2015. It now expects spending to grow by about 5 percent on average, down only slightly from 5.4 percent, but in the wider scope of a few trillion dollars, a fractional change still amounts to hundreds of billions of dollars.

Julie Bort of Business Insider got a Cisco spokesman to confirm it.

A little more than a year old, Umi was Cisco’s attempt to get consumers using their TVs for home videoconferencing. At $600, it was expensive, unwieldy, and ran up against the fundamental problem that consumers really don’t want to talk to each other from their living rooms in high definition. Also: Skype is pretty good, and it’s free, and there are other ways to videoconference without dropping big bucks.

Anyway, due credit goes to Cisco for trying. At least this time it chose to kill the product quietly, unlike the PR blowback it got when it killed its Flip videocamera last year. And Umi is not so popular a product that there will be a similar hue and cry this time around.

Also? No more awkward Cisco TV ads starring Ellen Page. Here’s one she did for the Umi:

Of the companies in Marshall’s coverage universe, only Apple, IBM and Dell had positive returns and saw their shares rise by an average of 20 percent. By contrast, the three biggest decliners were Hewlett-Packard, Juniper and NetApp. (For the record, the others Marshall covers are Brocade, EMC, VMware, Cisco Systems and F5 Networks.)

One thing the advancers had that the decliners didn’t? Conservative guidance. “The importance of conservative guidance practices was underscored as investors had little tolerance for companies that could not execute on stated growth targets,” Marshall writes. HP, NetApp and Juniper all set out aggressive earnings goals that proved too optimistic. Per-share earnings estimates for the coming year among those three were revised downward by an average of 15 percent.

By comparison, Apple, IBM and Dell set lower barriers and ended up having positive earnings surprises, and have moved up their forward earnings estimates by about 17 percent. “Setting conservative targets will again remain critical in 2012,” Marshall writes.

So what’s going to set the tone for tech stocks in 2012? A lot of the same things that made 2011 so difficult. Sovereign debt concerns in Europe, coupled with governments around the world implementing austerity measures to help get their budgets back on track, will hammer IT spending at companies that sell to governments.

That doesn’t mean there won’t be positive trends to look for. Certain megatrends in computing will sail on, despite the rough economic waters. “Cloud computing and mobile internet remain firmly in place and can drive outperformance for companies positively exposed,” Marshall says in his note.

The growth in mobile clients like smartphones and tablets will spur ever more rich and complex computing environments in the cloud, meaning more and better data centers packing more computing power into the same or smaller footprint. Marshall mentions microservers, which brings to mind HP’s Project Moonshot, which aims to create dense racks of small servers, as an important trend to watch. “We think many data centers could look to microserver solutions that deliver thousands of cores in a rack and order of magnitude improvements in performance/power,” writes Marshall. These microservers, he says, could be powered by both x86 chips from Intel or Advanced Micro Devices, or by ARM-based chips.

And since there will be more servers — all of them virtualized, allowing one single server to act like dozens or even hundreds of servers, plus increased demands for storage and video — they will require higher-performing connections. That’s going to push companies building data centers to adopt Ethernet fabrics. On top of that, more companies build servers that support faster 10 gigabit Ethernet. Marshall argues that these Ethernet fabrics could constitute as much as one-third of the $6 billion market for data center switching within three years.

Then there’s big data. With more information than they know what to do with scattered all over the place, companies are struggling to make sense of it all. Large enterprises will be investing in data integration tools to get a unified view of all their information. “We believe organizations will continue investing in data integration tools which can help link historical and real-time data, and enable more valuable business intelligence and predictive analytics,” Marshall writes, adding that the market is worth about $2 billion today, but is in the “early innings of a growth cycle.”

(Image courtesy of chainsawpanda)

Despite everything, corporate spending on IT was going to hold steady, went the conventional wisdom. Big tech companies selling to big companies — except the financial ones — were supposed to have the situation well in hand. All those big companies looking to get things done in a faster, cheaper and more efficient manner would be writing big checks to the big lumbering tech companies, which would translate into operational savings: Faster servers, faster PCs, cloud services, better software.

At least that was the conventional wisdom until today. Now Oracle has gone and harshed whatever buzz there was left. Once investors got their heads around the wider implications of the software giant’s disappointing quarter, they concluded that the entire enterprise tech sector required a sharp spanking. Here’s a rundown of the damage:

• Oracle shares fell by $3.40 or nearly 12 percent, and briefly traded within 20 cents of their 52-week low.
• IBM, recently the engine of steady, dependable tech growth, fell $5.77, or more than 3 percent.
• Cisco Systems fell 49 cents, or more than 2 percent, and teamed up with Big Blue as the day’s worst Dow performers.
• Salesforce.com fell 5 percent.
• VMWare fell nearly 10 percent.
• SAP fell $3.49, or more than 6 percent.
• Hewlett-Packard held up (relatively) better than the rest, falling only 47 cents, or less than 2 percent.

Okay, you get the picture. Investors wanted out of any stock that touched enterprise tech today. Oracle is considered a bellwether. The result was predictable. But does the crux of the argument that fueled today’s fear have any merit? Maybe not.

There are reasons to hope it’s not quite so bad. For example, IT consulting house Accenture, which saw its own stock fall more than 4 percent today, recently reported a pretty good quarter, with record revenues and earnings. Its strength came from $7.8 billion in new bookings, which isn’t exactly a negative indicator.

Second, even if corporate spending does slow down, tech M&A deals could help larger companies grow despite themselves. Oracle, Cisco and IBM have a combined $87 billion in cash and short-term investments among them. And as we’ve seen, there’s still plenty of appetite among large tech companies for gobbling up smaller ones, especially in the red-hot software-as-service space.

Recent examples include SAP’s $3.4 billion acquisition of SuccessFactors, Oracle’s $1.5 billion deal for RightNow, and Salesforce’s grab of Rypple.

And the potential targets are numerous: There’s Taleo, NetSuite, Workday; even newly public Jive Software.

Finally, the currency weakness that has Oracle and so many other companies running uphill when dealing with non-U.S. customers isn’t going to last forever. Yes, it’s true that IT companies like it better when the dollar is weak against the euro. Considered from that angle, Oracle and other global tech companies suffer less from a demand problem than a temporary — though it is going on way too long — currency problem.

But even if the euro crisis does last well into next year, there are still the BRIC countries, which Intel, another significant tech bellwether, can’t stop praising. And — dare I say it? — the U.S. economy is showing signs of coming back to life. In several states, private payrolls are growing just enough to offset the declines in employment at state and local governments, and as new tax revenue flows, government payroll declines will slow, as well. As 2012 wears on, the U.S. might find itself rolling into an honest-to-goodness recovery, which would fuel improvements to IT budgets. Though the hard-drive shortage caused by the flooding in Thailand won’t make this any easier.

So don’t worry. Or don’t worry too much.

So what happened? A few things, as Oracle execs tried to explain on a conference call.

• The currency effect: As President and CFO Safra Catz explained, what had been a 1 percent tailwind for currency effects turned into a 2 percent headwind. With all the violent swings in the value of currencies around the world as compared to the U.S. dollar, Oracle suffered a negative effect that pinched revenue.

• Deals didn’t close during the quarter: Catz said that in the final days and weeks of the quarter, some customers added an extra layer of executive approval to close deals to buy Oracle stuff. That meant that some deals Oracle had expected to close before the quarter’s end moved into the next quarter. Catz said that Oracle has taken steps to better manage deal flow to take this into account. It is consistent, however, with recent statements from other enterprise IT vendors, like IBM and NetApp.
• Transitions: Oracle’s SPARC server business just switched to a new chip called the T4, which was unveiled late in the quarter. The machines require a total upgrade, and that means a lot of testing with existing applications, which can slow down deals for the new machines, while at the same time sapping demand for the prior generation of products. That had a lot to do with hardware sales dropping by 14 percent year over year to $953 million. As Catz put it: “We saw good early demand for the new SPARC SuperCluster, but only released the product for general availability at the very end of the quarter, allowing us to ship only a couple.”

Catz also predicted that hardware sales will decline as much as 14 percent this quarter, although CEO Larry Ellison was bullish on its growth prospects later this year. New software license revenue, a key metric gauging software sales, is expected to grow in a range of 2 percent to 12 percent. Total sales are expected to grow in the range of 3 percent to 7 percent, and per-share earnings are expected to come in between 56 and 59 cents, which is in line with the consensus of analysts.

There were a few things that went right. Ellison did what he usually does on a conference call, and crowed about examples where Oracle is beating a competitor. This time, the targets were IBM, Cisco Systems and SAP, but not his usual punching bag, Hewlett-Packard. Oracle won several competitive deals from Big Blue and Cisco, as well, with customers as varied as Australia’s University of Melbourne, the U.S. Food and Drug Administration and the Hyundai Kia Motor Company.

Ellison also hinted that Apple is a big Oracle customer. He mentioned a “a very large American smartphone manufacturer” that had bought more than 30 Oracle Exadata systems as it built out its cloud. Unless I’m missing something, there’s really only one company that fits that description, and that’s Apple. Its use of Oracle gear within the mix at its North Carolina data centers has been speculated about before, but never confirmed by Apple directly. (Big surprise, that.)

Topsy’s co-founder and now former CEO, Vipul Ved Prakash, will remain the company’s main technical guru while he becomes CTO, and will run platform and product engineering.

Greatwood’s job will be to scale the company up, which sounds like it will be interesting. I talked with Greatwood and Prakash yesterday, which was Greatwood’s first day on the job.

With so much social data being created on Facebook and Twitter and so many other places, Topsy was built to index it all and make it searchable, and analyze it. “There’s a lot of exhaust that’s being created around analyzing social data that applies to so many businesses, from finance to publishing,” Prakash told me.

Greatwood said that what attracted him to Topsy was the fact that it’s a lot more than a search or analytics engine. “It really lets you extract some deep analytics information from a broad array of data sources,” he said. Think about all the time and effort a company devotes to analyzing who and how many people visit its Web site using products like Google Analytics or Adobe’s Omniture. “At the same time there are probably lots of conversations taking place about that company or just conversations that company would be interested in,” Greatwood says.

Sales are starting to take off, Greatwood says, and though the customer base is small right now, there’s a great deal of interest from the marketplace. “We have a small number of customers, but within that group there’s some very big customers, and they’re driving an acceleration of sales over the past few months.” He wouldn’t divulge many customer names, but one that’s already been disclosed is AOL’s Huffington Post. The plan is to take Topsy’s products to a broader market during the year.

Topsy raised $15 million in a Series C round led by BlueRun Ventures in March with prior investors Western Technology Investments, Ignition Partners, Founders Fund and Scott Banister, the founder of Ironport, participating. Its total capital raised so far is about $30 million.

Today, Cisco finally laid out a cohesive strategy to become a significant player in the cloud business. It announced an offering called CloudVerse that combines three big elements — its Unified Data Center, Cloud Intelligent Network and Cloud Applications — into a big portfolio aimed at companies building out their data centers.

The idea is basically this: If you want to build a cloud, either to resell cloud services of some kind or for your company’s own internal operations, Cisco wants to talk to you. Under the CloudVerse tent are a bunch of offerings including computing, networking, collaboration and software for automating and managing it all.

Cisco named a handful of companies who are already CloudVerse customers, and a few will catch your eye, because they’re big. One is Terremark, the Web-hosting and cloud-services outfit that telecom giant Verizon acquired earlier this year. Others include Telecom Italia, Telefonica Spain and Fujitsu.

Naturally, Cisco is hoping to use its position as the supplier of choice for networking gear as a springboard into selling more stuff inside the data center, and it already has key relationships with many a corporate CIO. A key part of its go-to-market strategy will be convincing those CIOs that it has something unique to offer.

Here’s one such thing: The Network Positioning System and Cloud-to-Cloud connected. Imagine you have a sprawling set of far-flung data centers around the globe. When one center gets starts to get close to reaching its capacity load — maybe it’s Cyber Monday or something — Cisco’s NPS technology allows the routers in one data center to start automatically looking around for capacity elsewhere, to keep things humming along.

There’s a lot more detail to it, but it’s worth pointing out that, as a percentage of Cisco’s business, the cloud business isn’t huge. On an earnings conference call with analysts last month, CEO John Chambers said that the Unified Computing System that forms the backbone of its server business had recorded 116 percent revenue growth year over year; even with that, it’s on run-rate to being a $1 billion annualized business. If it hits that mark in Cisco’s fiscal year 2012, which ends in July, it will amount to about 2 percent of estimated annual sales.

But Cisco expects the cloud business opportunity to grow like crazy. Last week, it issued something called the Cisco Cloud Index, which estimates that more than half of all computing workloads will be running in data centers by 2014, and that the daily traffic conducted on cloud services of various types will amount to 1.6 zettabytes per year. My math may be off a bit, but compare it to the scale of your average hard drive — a zettabyte amounts to a billion terabytes, or a trillion gigabytes. Cisco describes it as enough data to amount to four days of high-quality video streaming for every person on Earth.

It’s a serious opportunity, no doubt. The question is whether or not Cisco can exploit it in a manner that moves the needle. Doing so is an important part of the strategy that Chambers set forth as part of the epic restructuring that has been going on at Cisco since last year. Investors seem to like what they see, as Cisco shares are trading at $18.80 today, which is up 41 percent from a recent 52-week low. As turnarounds go, it does look like progress.

In a Cisco blog post, the company’s general counsel, Mark Chandler, accused HP of overzealously lawyering up to try to stop former HP employees from going to work for Cisco. The fear is that those former employees will share HP’s confidential information to Cisco’s benefit. “Trade secrets are protected by intellectual property laws, not by non-compete agreements and vague theories that a new job would ‘inevitably’ cause an employee to use trade secrets of his or her former employer,” Chandler helpfully reminded HP’s legal team.

Courts in California have generally held the kind of noncompete agreement that would prevent someone leaving HP for Cisco, or vice versa, to be unenforceable. But one of the people in question used to work for HP in Texas, and moved to California for the Cisco job. HP lawyers, Chandler says, swooped into a courtroom in Texas hours before a related hearing in California (the point being that the court that hears the case first is the one that tends to decide the case).

Chandler doesn’t name the employees involved, but that Texas-to-California move sounds an awful lot like the case of Paul Perez, the former CTO of HP’s StorageWorks, who resigned earlier this month for a job at Cisco; John Marsh, at the Ohio law firm of Hahn Loeser, writes about the case here.

I asked HP for a comment on this, and they haven’t gotten back to me. However, HP is not the only one with aggressive lawyers trying to enforce noncompetes. A federal appeals court recently ruled in favor of HP and an executive it had hired earlier this year from IBM. Giovanni “John” Visentin, who had been a general manager, quit his job at IBM in January and said he was going to HP, but offered to stay on for a transitional period. IBM sued him the next day, and asked the court for an injunction that would have prevented him from taking the job. The trial judge and the appeals court both ruled that IBM’s aggressive behavior made the “emergency” its lawyers said existed worse by its refusal to even talk to the employee.

Chandler closes his post with a promise that the company “will apply California’s rule in favor of employee mobility nationwide,” which is a comfort should you be mulling a job offer from Cisco and work at a rival outfit.

And though the circumstances are different, Cisco is not without its own history of over-aggressive lawyers, as in the infamous case of Peter Adekeye, a former Cisco employee who started his own company servicing Cisco gear; Ars Technica covered the case here. Having filed an antitrust suit against Cisco in the U.S., Adekeye wound up arrested and detained in a Canadian jail. A judge there finally let him out, saying that the only “reasonable inference I can draw from the facts is that the criminal process was used to pressure the applicant (unsuccessfully) into abandoning his antitrust lawsuit against Cisco.”

When it comes to ex-employees, lawyers tend to get really tough.

Update: Like I said, the Adekeye case is different circumstances, and as a Cisco spokesman points out in the comments below, Adekeye is under indictment; though it’s been described as a “ridiculous” case, you sure can’t beat it for weird legal twists and turns.

When you think of it that way, you might wonder why GE doesn’t already have some kind of operation in Silicon Valley, where all the world’s best software engineers are. Today, the company is rectifying that with the announcement of a software development center in San Ramon, Calif. It will employ about 400 workers.

The reason, says Bill Ruh, GE’s VP and global technology director — he’s the guy who will run the place — is that the so-called “Internet of things” is becoming a reality. This, Ruh thinks, will morph into something of an industrial Internet, which is directly in GE’s wheelhouse. “We will make our devices more intelligent, which will be driven by software, collect that data, and do some high-end analytics on it, and then drive it to our own people and to our customers,” Ruh told me. He joined GE earlier this year, after almost seven years as a VP at Cisco Systems.

Smart devices, he says, are “table stakes,” but what’s more important is the data they generate, and what you do with it. “At the end of the day, the analytics is where the action will be,” Ruh says.

Here’s an example. GE makes a product called “My Engine,” which Ruh describes as a “Facebook for engines.” If you’re the person in charge of maintaining the engines on a particular plane, wouldn’t it be helpful if you could keep track of its status as easily as you might the drinking and dining habits of your friends on Facebook? Of course, the engine and all its parts would need to have some Internet smarts built in. But once that’s done, there’s a lot of data worth tracking and analyzing about where the planes go, the conditions they fly in, which parts tend to fail or need replacing more often, and so on. From there, it’s a short leap to reorganizing maintenance schedules to be more efficient and less costly.

That’s just one example, and GE has a lot of software that’s specifically geared toward its various lines of business. Out of that, Ruh says, come some “big themes” that will apply to outside customers. “If you look at remote monitoring and diagnostics, that kind of stuff is broadly the same, whether you’re monitoring a wind turbine or a CAT scan machine,” he says. “So we have some horizontal plays that we see coming out of this.”

This is the third new software center for GE in recent years. The other two are near Detroit and near Richmond, Va. Design work on the San Ramon site is under way, and employees will start moving in near the middle of next year.

By February, the temporary turbulence appeared more permanent. Chambers said that Cisco had entered a “period of transition.” Some transition. First came the unceremonious execution of the Flip videocamera business, a decision which has never — even months later — been fully explained.

Then came the job cuts — 6,500 from Cisco itself; another 5,000 and change were transferred to the Taiwanese manufacturing giant Foxconn. Cisco is now a much lighter operation, yet still on its way to cutting $1 billion in operating expenses.

The results so far speak for themselves. Cisco’s results packed a serious wallop to the expectations of Wall Street analysts, who are falling all over themselves today to upgrade Cisco’s shares.

“An underappreciated turnaround story,” was the phrase Shaw Wu of Sterne Agee chose to describe Cisco in a note to clients today. “Showing tangible evidence that execution has improved,” wrote Brian Marshall for ISI Group. Brian Modoff of Deutsche Bank upgraded Cisco to “buy,” and raised his target price to $22 from $17. So did John Slack at Citigroup, and Todd Koffman at Raymond James. Cisco appears to be “on the right track,” wrote Ittai Kidron of Oppenheimer & Co.

Shares are surging accordingly. As of 10:35 am ET, they’re up by $1, or more than 6 percent, to $18.61. That’s not a full recovery to where it was before this whole drama began a year ago, and yes, it has been painful to get to this point. But it’s a start. The question now is whether Cisco can make it stick.

As I listened to the conference call with analysts yesterday — and watched the stock climb this morning — I kept hearing in my head the song “How You Like Me Now?” by the Heavy. This morning, I thought I’d share it. Enjoy:

The results were better than the consensus expectation of analysts who had called for Cisco to report earnings of 39 cents per share on sales of $11.02 billion. Cisco shares rose 1.5 percent after hours, but fell by more than 4 percent during the regular session, closing down 75 cents at $17.56 price.

In a company statement, CEO John Chambers called the results a “a solid quarter,” and went on:

“We’ve completed the majority of our restructuring and have organized Cisco to successfully execute against our strategy of providing intelligent networks, architectures and integrated products that solve customers’ business problems. Even in times of limited capital spending, intelligent networks are being deployed to drive new business, revenue and consumption models, enable new customer and employee experiences, and drive efficiencies. Cisco’s leadership in networking, video, collaboration and cloud, offered together in an integrated architectural approach, uniquely positions Cisco as a strategic business partner.”

Cash flow from operations was $2.3 billion compared with $1.7 billion for the first quarter of fiscal 2011. On a conference call with analysts, Chambers said orders for products grew 13 percent. Gross margin in the quarter was 62.4 percent.

Cisco exited the quarter with combined cash, cash equivalents and investments worth $44.4 billion, down slightly compared with $44.6 billion at the end of fiscal 2011. The company used $1.5 billion of its cash to buy back 100 million shares at an average price of $15.37 per share.

Cisco CFO Frank Calderoni said the company expects revenue in the second quarter in the range of $11.14 billion to $11.24 billion. This is slightly higher than the consensus expectation of $11.13 billion, which would represent revenue growth of about 7 to 8 percent. Per-share earnings will be 42 cents to 44 cents slightly ahead of the street, which is at 42 cents. Calderoni said Cisco expects to see a gross margin of between 61.5 percent and 62 percent. This includes $100 million worth of expected restructuring charges.

Update: So where were the strengths and weaknesses? The cloud for one thing. For one Cisco’s Cloud business where orders grew an eye-popping 122 percent. This is the business where Cisco is taking on bigger companies like Hewlett-Packard and Dell in supplying compute infrastructure for data centers. Its product here is the Universal Computing System that it jointly runs with VMWare and EMC. Cisco’s revenue here is up 116 percent. Nice growth indeed, but as a percentage of revenue, it was pretty small in the quarter, amounting to just a hair above 2 percent. Still, Cisco added 1,572 new customers to its growing stable of UCS customers, which now numbers nearly 9,000.

Collaboration, which includes the video and TelePresence business saw orders grow 16 percent and revenue grow 12 percent in the quarter. This is a much bigger business, and amounted to more than $1 billion or nearly 10 percent of sales.

On the , Chambers, in response to a question about the strength of the financial sector said Cisco is working with a “very very large financial company,” that he would not name, though it is a US company. “We’re aligning at the hip,” Chambers said, in how the company — it sounded like a big retail bank or investment house given the way he described it — collaborates with its financial advisers and its branch locations.

Usually these deals are done with a lot of secrecy. Banks don’t like other banks knowing whose gear they’re using lest they give away a competitive secret, but Chambers is clearly bursting at the seams to talk about it, and if its a big enough deal, perhaps we’ll learn who its with soon.

So is Cisco on the road to the turnaround it has been promising since missing earnings expectations badly in February? Maybe so, says Stifel Nicolaus analyst Sanjiv Wadhwani in a note to clients. He says he expects Cisco to slightly beat guidance that has sales in the range of $10.86 billion to $11.18 billion, which would amount to growth of between one and four percent.

Wadwhani says checks with Cisco resellers show an improvement in pricing versus the year-ago period, though it’s hard to know whether that’s temporary. Hewlett-Packard’s networking business may be exerting less pressure on Cisco because of its own recent corporate drama.

Additionally, the product transition in the switching business that Chambers had blamed for many of Cisco’s earnings difficulties in prior quarters appears to be largely completed, Wadhwani says — which means business will not be the drag on results that it has been in recent quarters. “Overall, we believe that switching performed in line to slightly better versus expectations.”

Also performing better than expected, he says, is Cisco’s routing business, in which it has been taking share away from Juniper both in the core and edge routing businesses.

The consensus of analysts calls for Cisco to report earnings of 39 cents on sales of $11.02 billion. Wadhwani rates it a buy with a target price of $20. That would get it close to the $20.23 its shares traded at the end of 2010. With Cisco trading down 79 cents today — or more than four percent, given the swoon in the wider market — the shares have fallen by more than 13 percent this year.

The announcement could occur as soon as today. Disney declined to comment, and Indiagames founder and CEO Vishal Gondal did not respond to emails seeking comment.

In July, Disney bought Indian media conglomerate UTV, which owned a stake in Indiagames, so Disney’s acquisition would consist of purchasing the remaining shares it does not already own.

One source says the company is being valued at $80 million to $100 million, and that Disney already owns roughly half of the company, meaning it will end up spending as much as $50 million on the remaining stake. Other Indiagames shareholders include Adobe and Cisco Systems.

Indiagames, which was founded by Gondal in 1999, has more than 300 employees and has offices in Mumbai, Beijing, London and Los Angeles, according to its Web site. Some of its recent games include Cricket WorldCup Fever, Bruce Lee Dragon Warrior, Godzilla — Monster Mayhem and Acorn Mafia, on the iPhone and iPad. It wasn’t until recently that it experimented with making social games on Facebook.

The acquisition by Disney could be following up on recent statements the company made to investors, saying it was interested in building a larger footprint in other countries, especially in India. Additionally, Disney identified mobile content as one of the key ways to distribute its brand.

A recent profile of Indiagames in Business Standard reported that the company recorded a profit of $400,000 on revenues of $11 million in its last fiscal year (that is converted from Rs 2 crore and Rs 54.5 crore, respectively).

Cisco also did what many analysts have been urging for some months and reduced its long-term growth targets to levels it has a better chance of meeting. It said it now expects revenue to grow annually at 5 to 7 percent through 2014 and called for operating margins in the 25 percent range, which is pretty much in line with what some analysts had suggested.

So were they convinced? A little. John Marchetti of Cowen and Co. called it “a positive analyst day.” The more aggressive stance versus competitors and the realistic targets should give the shares a “boost over the near term,” he wrote in a note to clients today. While Cisco’s valuation, which is at about nine times Marchetti’s forward EPS for the 2012 calendar year, is arguably low, he kept his rating at neutral. “Shares look cheap,” he said, “but we do not see a near-term catalyst to drive the stock higher and believe the muted growth outlook and macro-headwinds especially in light of Cisco’s exposure to government and European customers.”

Sanjiv Wadhwani of Stifel Nicolaus was more convinced. In a note to clients today he wrote that “the worst seems to be behind” Cisco following a product transition in its switching business that was responsible for at least part of its troubles over the last few quarters. Moreover, the pricing environment in switching — which had been driven down in part by an aggressive Hewlett-Packard campaign and profit margins on many of its switching products — are “approaching historical levels.” On top of that, he says Cisco has some moves it can make to trim some operational expense — he called them “opex levers” — to make sure that per-share earnings grow faster than sales. He rates Cisco shares a buy with a $20 price target.

Cisco sees Juniper as being “spread too thin” in the marketplace right now, Wadhwani writes. But Cisco’s line of attack won’t necessarily be lower prices. Indeed, the opposite may be true, he wrote: Cisco “will intensely focus on gross margins going forward.”

But that’s not to say there won’t be other weapons, like marketing trash talk. Here’s a sample: Cisco has launched a site where it accuses Juniper of “overpromising and under-delivering.” If there’s more to come like this — frankly, from both sides — the fight should be fun to watch.

Additionally, Chambers (pictured from his interview at D5) will likely lay out his plan to get Cisco growing again, following a restructuring that saw 6,500 jobs eliminated, and certain parts of the company — in particular, the Flip video camera business – shut down.

Financial analysts have been agitating for Cisco to take down its long-term financial models for most of the year, and since they’ll be the ones in the audience today, Chambers would be nuts not to address their concerns. The model may seem like a small detail, but analysts rely upon these forecasts in order to help them calibrate their expectations, and thus help their clients make better investment decisions going forward.

One recent suggestion for how the new model should look came from Gleacher analyst Brian Marshall in a note to clients on Aug. 11. He suggested that Cisco could realistically forecast annual revenue growth of 10 percent and an operating margin of 25 percent. Currently, he says, Cisco’s long-term growth models call for sales to grow annually in the 12 to 17 percent range, with operating margins in the range of 28 to 31 percent. Over the last five calendar years, he wrote, Cisco has averaged revenue growth of 11 percent — worse if you exclude growth from acquisitions — and operating margins just shy of 29 percent.

But it won’t all be numbers and figures today. Alongside the analysts meeting, Cisco will be talking about some new server technology it has developed internally using the UCS computing platform it developed with EMC and VMWare. Cisco has opened up a data center in Raleigh, N.C., that it says is being used for two things — applications development and disaster recovery.

Now, if you don’t know anything about disaster recovery, allow me to explain why that’s a big deal. The typical way companies use disaster recovery is to have a second data center — essentially a carbon copy of the first one that’s used day in and day out — sitting on standby, waiting for the day when it is needed. And while it’s critical to have when the power goes out at your primary site, or some natural disaster like a tornado strikes, it’s also expensive. Disaster recovery hardware sits around doing nothing important, while at the same time racking up costs for power, maintenance and floor space. Wouldn’t it be great if you could use it productively, too?

Cisco has figured out a way to do exactly that, and will demonstrate it today. The data center, which is in Research Triangle Park, has been set up to support application development on a daily basis, but if disaster strikes one of Cisco’s other main data centers — its sites in Texas, for instance — it can be turned around within 24 hours and serve as a disaster recovery site. Oddly, Cisco is demonstrating this mainly as a way of showing off what UCS can do, and it’s also sharing the particulars with customers. It is not, however, offering it as part of a new product or service.

Cisco shares are still trading in the midteens, down from a 52-week high of $24.60 in November. The shares are showing new signs of life, however. Having bounced off the bottom of a 52-week low of $13.30 last month, they’re starting to climb again. And yesterday Cisco rose 54 cents, or more than three percent, to $16.09. Investors seem hopeful that there will be a better outlook from Cisco today.

The start-up, backed by Greylock Partners, Sequoia Capital, Globespan Capital Partners and Jafco Ventures, tapped McLaughlin in a sign that it is gearing up for an IPO. I talked today with Asheem Chandna, a Palo Alto Networks director and partner at Greylock, about the new hire and about the crazy growth the company is going through right now.

AllThingsD: Asheem, I always ask people to start at the top: What is Palo Alto Networks and what does it do?

Asheem Chandna: We’re in the network security space. We build next-generation firewalls technologies. We ship an appliance that contains some subscription services on it so in a way it combines the business model of Cisco with that of Salesforce.com.

And how big is the business?

We disclosed that we’re on a run-rate to $200 million in revenue, and we have 4,500 customers. We’re cash-flow positive for the past five quarters, and we’ve been shipping product for 16 consecutive quarters. We have about 450 employees in the company today and we expect to add another 350 in the coming 12 months.

So you have more than 4,500 customers. Can you name any? Security companies are often reticent to do that.

We have many we can name, several of which we’ve done seven-figure deals with. Some we announced today: Qualcomm, eBay, Verisign, Cricket, the Los Angeles Community College district. Others we’ve named before include SanDisk and Constellation Energy.

And what prompted you to hire Mark McLaughlin from Verisign? Was it him or was it his experience at Verisign that got you interested?

What we were really focused on was leadership capability, what Jim Collins would call a Level 5 leader and the raw IQ, intensity and discipline. We’ve known Mark for several years, he’s an exceptional leader and one of the best leaders I personally know.

How did the search go down?

We had a search under way for eight months. It’s taken that long because this is a one-in-a-decade company. It’s one of the fastest growing companies in enterprise IT. We were deliberate and focused on really finding the right person, who would be a good cultural fit with the team. We hired Russell Reynolds to help us with the search. We reviewed more than 150 people in detail, and interviewed more than two dozen people. There were many senior executives at public companies who were interested in this position.

Every security company tries to solve a particular problem, and my understanding is that Palo Alto Networks can detect traffic coming from certain applications. So when I’m signed into Facebook or Tweetdeck or Skype on a network where your gear is in use, you can detect it and watch out for good and evil traffic on those applications, and block the bad traffic. Is that right?

Exactly. That’s one of the three basic innovations that are our bread and butter. The one you just described is really our headline feature. We can uniquely identify applications and users as they pass through the firewall and the network. The second is around malware. We can scan for malware at very high speeds, which is also something that hasn’t been done before. Finally, we collapse multiple network functions that are usually done on individual appliances into one large system but without a degradation of performance. We do Web filtering and intrusion detection, which are traditionally done on separate network appliances. Network administrators are struggling with appliance fatigue. We are giving them the ability to roll all those things into a single appliance with no degradation of performance.

So, since everyone is going to start asking: When are you going public? Are you going to be hiring bankers soon?

We haven’t set a date for any of that yet. The focus is really to build and grow the company to the next level. Going public is just another milestone. We want to be the biggest independent network security company in the industry.

The comments from the Sunnyvale, Calif., company raised concern about second-half spending on networking products and weighed on the sector’s stocks Wednesday. Industry giant Cisco Systems Inc., which has talked about the economy’s “mixed signals” and air pockets for almost a year, fell 3.7 percent.

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