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.

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)

Last week, I posted on the so-so overall performance of tech stocks in 2011.

Most were in the negative numbers going into last week, and they stayed that way for the full-year comparison.

Bottom line: Tech was a bad investment if you started buying stocks on the first day of trading in January of 2011. And you got really socked if you bought into most of the IPOs of a spate of new Internet companies.

No pressure for 2012, Facebook! (I’m talking to you, Sheryl Sandberg!)

As we open trading this morning after the holidays, here’s where we stand with share prices since one year ago from a sample group I wrote about the most in 2011:

UP

Google: Rose 8.7 percent.

eBay: Rose 8.98 percent.

Apple: Rose 25.6 percent.

Jive Software: Rose 6.7 percent (went public December 15, 2011).

DOWN

Amazon: Declined 4.3 percent.

Yahoo: Declined 3.01 percent.

Microsoft: Declined 6.99 percent.

Cisco: Declined 10.6 percent.

ROUT-ROH DOWN

AOL: Declined 36.3 percent.

Hewlett-Packard: Declined 38.8 percent.

Juniper: Declined 44.7 percent.

FRESHMAN SLUMP (AND INVESTOR DUMP)

Zynga: Declined 0.95 percent (went public December 19, 2011).

Groupon: Declined 20.99 percent (went public November 7, 2011).

LinkedIn: Declined 33.2 percent (went public May 20, 2011).

Pandora: Declined 42.5 percent (went public June 16, 2011).

Yandex: Declined 49.3 percent (went public May 25, 2011).

The Flip Camera
San Jose, Calif. — The Cisco Flip, a beloved handheld video recorder, was killed on April 12, 2011. Its untimely death was a result of the realignment of Cisco’s consumer electronics business.

Born in May 2006 as the Pure Digital Point & Shoot, the pocket camera went through many evolutions in its lifetime, later becoming the Flip Ultra and spawning the Flip Mino and Flip MinoHD. It found a new home in 2009, when it was acquired by Cisco for $590 million. The Flip was known as the life of the party at birthday and wedding celebrations, and will be remembered for its simplistic design and pop-out USB arm. “People literally flipped for the Flip when it first came out,” a friend of its parents, Pure Digital, said. It is survived by a number of boiled-down point-and-shoots and countless smartphone cameras, as well as video-sharing apps with annoyingly cute names like “Viddy.”

Its distant cousin, the Kodak Zi8, also went missing from the Kodak store earlier this year.

Guitar Hero
Santa Monica, Calif. — For Guitar Hero, Feb. 9, 2011, was the day the music died. The videogame franchise was killed when Activision announced during its fourth-quarter earnings call that it was shuttering the business unit dedicated to Guitar Hero.

The popular game was born in 2005 to Red Octane and Harmonix, and was distributed by Activision. Later iterations of Guitar Hero, which were developed by Neversoft, had band-specific titles and also incorporated more instrumental props, so fans could play drums or sing as well as play guitar.

But Guitar Hero sales fell off, and the game was eventually overshadowed by its record-breaking Activision siblings, the Call of Duty and World of Warcraft series. Revenues of Guitar Hero fell from $1.7 billion in 2008 to about $300 million in 2010.

Guitar Hero will be remembered for its love of music, with Aerosmith, Metallica and Van Halen among its favorite artists, and for creating living-room rock arenas for millions of users.

Guitar Hero is survived by Rock Band, Rocksmith, Rock Revolution and likely many other console and mobile games starting with “Rock” that we’re not aware of or haven’t been invented yet.

HP TouchPad
Palo Alto, Calif. — That flame which doth burn brightest often burns out quickly, or something like that.

The HP TouchPad was effectively killed on Aug. 18, 2011, at the young age of just 49 (that’s days). Prior to its demise, the TouchPad was praised for its bright 9.7-inch display, Beats audio and mostly for the fact that it ran HP’s intuitive webOS mobile operating system, though the tablet ultimately saw disappointing sales during its short life.

Hewlett-Packard, its maker, said webOS devices had not gained enough traction in the marketplace with consumers, and couldn’t justify continuing to produce hardware like the TouchPad around it.

HP’s new CEO, Meg Whitman, said later on, “I think we’ve got to walk before we run here.” The TouchPad is survived by a newly open source webOS system and a cult of rabid fans, as evidenced by its post-mortem fire sales. It joins the Microsoft Kin phone in a special Afterlife for Tech Products Less Than 50 Days Old, while its operating system remains in a state of purgatory.

Dell Streak Tablets and Mini 10 Netbook
Round Rock, Texas — The streak was not a long one.

Dell’s Streak 5 tablet, which was originally demoed at D8 in 2010, disappeared from store shelves in mid-August of this year. Dell hardly had time to recover from the loss before its sibling, the Dell Streak 7, was also discontinued.

Shortly after the loss of the Streak tablet, tragedy again struck the Dell family, when Dell confirmed it would no longer make consumer netbooks, feeling the pressure of tablets as well as an emerging shift toward thin, light “ultrabooks” in the laptop category. The Dell Mini 10 was known for being small, as netbooks are, and for being that laptop you knew you could always fit on the seatback tray on an airplane.

Apple MobileMe
Cupertino, Calif. — June 6, 2011, was Steve Jobs’s last appearance at an Apple Worldwide Developers Conference. It was also the day MobileMe effectively went away, with Jobs saying the $99 dollar service wasn’t Apple’s “finest hour.”

MobileMe launched at WWDC in July of 2008, and was meant to sync calendars, emails, bookmarks and photo galleries. For individual accounts, it came with 20 gigabytes of online storage and 200GB of monthly data transfer.

While great in theory, our friend MobileMe was not without flaws. In fact, AllThingsD’s Walt Mossberg said, in his review of the service, that MobileMe was “far too flawed to be reliable.”

Apple’s Internet-based sync services since 2000 have evolved, but have never truly gone away: Like an actual ghost, we know they’re there, and we see glimpses of how they work, but they still elude many people. MobileMe, in its earliest form, was iTools, and later on, the subscription service .Mac. Even now, we’re not entirely sure whether MobileMe was killed or simply reincarnated as something new — in this case, iCloud.

Adobe Flash on Mobile
San Jose, Calif. — This is the way mobile Flash ends: Not with a bang, but a whimper.

On Nov. 9, Adobe said it would no longer be developing Flash, its platform for interactive and rich media content, for mobile devices.

Macromedia Flash was born in 1997, the spawn of FutureWave’s FutureSplash Animator. Macromedia was acquired by Adobe Systems in 2005, thus becoming Adobe Flash.
As smartphone and tablet wars heated up in recent years, Flash support became one of the features that iPad competitors — mainly Google Android devices — touted to set themselves apart from Apple’s mobile products.

The tech world has contemplated what this could all mean for the future of Flash. As AllThingsD’s Ina Fried wrote, Flash’s death on mobile was seen as a vindication for the late Steve Jobs, who took a controversial stand by not supporting Flash on Apple’s mobile products. Could Jobs once again have seen the future? Flash is not a completely dead standard yet, but with developers increasingly adopting HTML5 as the new standard for Web language, it’s unclear what exactly will become of Flash.

Google Buzz
Mountain View, Calif. — A standard housecleaning session turned fatal this past October when Google pulled the plug on its social networking effort. Google Buzz, the predecessor to Google+, aimed to create a social network through Gmail.

Social and gregarious by nature, Google Buzz was born in February of 2010. Its early life was filled with strife, as users struggled to grasp the real-time social interactions that were occurring within email chains, and real privacy concerns emerged.

Despite its short life span, the memory of Google Buzz surely remains, as the search giant eventually had to settle with the FTC over privacy violations and is now committed to 20 years of privacy audits.

Memories, indeed.

Google Buzz is survived by Google+, and follows Friendster and Myspace to the social graveyard, although technically those still exist.

Readers, what do you think was the greatest tech product loss in 2011?

The stock market is closed today, as part of the Christmas holiday. But it is doubtful — barring any major announcements — that the vastly different performances seen by a range of tech companies will change much.

Which is to say, some companies — such as eBay and Google — did well, although only Apple shares rose significantly enough to cause festive feelings.

As of Friday, Google rose almost 7 percent for the year to date, eBay rose 10.8 percent and Apple was up almost 26 percent.

As for all the others in tech? Lumps of coal for investors of varying size.

Let’s start with the better negative performances: Amazon was down 1.95 percent, Yahoo was down 2.7 percent and Microsoft was down 6.7 percent.

Not exactly anything to wassail about. And Yahoo shares were only down a little, since the recent swirl around its possible sale gave its stock a recent bump, or the performance would have been worse, based on its financial results.

And the oft-troubled AOL? Down 35.3 percent.

The crop of new Internet companies was also not doing so great. The latest, Zynga was down only 1.2 percent, Groupon down 12.5 percent and LinkedIn down 32.3 percent. Pandora truly tanked, with a 42.5 decline in share price. Only Russia’s Yandex bested that, with a 48.6 percent drop.

Enterprise-focused companies also had a lackluster year. While recently public Jive Software was up 9.2 percent, Cisco was down 8.7 percent and Hewlett-Packard was down 38.5 percent. Juniper got truly socked, with a 43.6 percent decline.

The music you are looking for right about now is “(Hey, Won’t You Play) Another Somebody Done Somebody Wrong Song” by B.J.Thomas, which you can enjoy here in this timely video:

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.

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.

11:39 am: A few introductory remarks, and Ina Fried welcomes Roese to the AsiaD stage.

Ina Fried: Hi again, everyone. I’m very excited that our next speaker is John Roese of Huawei. Huawei, for those of you who don’t know — I’m sure everyone in this room does — is, you know, a huge Chinese networking giant involved in all kinds of areas, from making devices, making the networks that devices run on, and has quietly, over the last many years, amassed just a huge talent pool, not just here in Asia, but also in the United States. And John Roese oversees the U.S. R&D arm, which I actually didn’t realize is composed of as many thousands of engineers as it is. John also has an interesting career as CEO of Nortel, and several other technology companies before that. So, without further ado, John Roese.

Maybe, I think, John, the most helpful thing would be to talk first a little bit just about Huawei and what are the businesses it’s in.

John Roese: Most importantly, everybody knows that Huawei is a telecom company selling things to carriers. But this year the company has gone through a complete transformation to become an ICT company, and it’s based on the premise that in the future, most problems will not be solved purely by the consumer, the carrier, or the enterprise ecosystem. You actually have to combine the technologies from them to solve problems.

And so while we had a big carrier business and continue to be currently the second-largest carrier company in the world, in terms of equipment suppliers we quietly have emerged as a consumer company with a multibillion dollar consumer company in the handset business, and now have entered the market as an enterprise player with … about $4 billion in enterprise sales, which makes us probably the second or third largest in the world.

So the company is redefining itself on a premise that the future is not about distinct silos of technology, but how you put them together in a coherent way to actually solve more complex problems in this next generation of ICT.

Ina Fried: So everything’s all related, but let’s break it into silos for a second. What are the different products you guys make? You have networking — both, I think, wired and wireless — although carriers are certainly what you’re best known for. You guys make phones and tablets which have been less in the U.S. but starting to show up first, I think, through smaller carriers and now through some of the major carriers. What other kinds of products do you make?

John Roese: To put it into context, my role in the U.S., I’m responsible for advanced technology across all of the business lines. And I kind of joke with people that, in just my organization, you can go from dealing with people developing photovoltaic technology, to cloud technology, to next-generation cellular technology, to enterprise switches and routers, to core optical networks, to handsets and tablets and smartphones. It’s really the entire spectrum, and it’s probably one of the broadest toolkits of any company in the industry, in terms of providing the communication infrastructure for — everything. It’s a strange answer, but if there’s a way to communicate, there is probably Huawei technology involved in that communication ecosystem.

Ina Fried: And let’s talk about the organization you oversee. First of all, explain to people the scale. Because I certainly didn’t have an appreciation for just how many people Huawei had in the U.S. And talk about what they’re doing.

John Roese: So, obviously, over the years Huawei has gone from out-executing a lot of people in front of us to now out-innovating and being the leader in many segments. We’re now the market share leader and the innovation leader. And as part of that, we realized we had to operate globally. We had to create a global ecosystem of innovation. The biggest change in that was this conscious decision to expand our innovation organization worldwide.

So my charter was to come in and essentially scale the North American organization from a few hundred people to well over a thousand people now, that are all chief scientists, chief technology officers. The average seniority in my organization, from an engineering perspective, is probably 25 to 30 years in the industry, these deep, deep experts that, quite frankly, have created many of the industries that we’re dealing with, in terms of technology. So that thousand-plus people that’s emerged over the last year is the tip of an arrow that, behind it, is today approaching almost 60,000 engineers around the world, many of them in India and Europe, and a huge portion of them in Shenzhen, Beijing and other provinces in China.

Ina Fried: So, 60,000 engineers — some huge percentage of the company’s overall workforce — are actually engineers.

John Roese: Absolutely. As a technical guy, and having been an executive of many companies, one of the things that attracted me to Huawei was it’s still a very technical company. Almost 50 percent of the company is R&D. There are very few companies that have this kind of emphasis on the development of technology, as opposed to other aspects of the business.

Ina Fried: And how did you build this workforce in the U.S.? You’re in many sites in the U.S. and Canada; um, from what I recall, you’ve basically cherry-picked some of the companies on the downturn and grew that way.

John Roese: I answered that question to some folks in the U.S. government; they asked the same question about how, isn’t it challenging to attract people? It was kind of an interesting conversation. I answered it, “One person at a time.” We candidly looked at where innovation was happening and tried to make sure that we had a presence close by, so we could tap into those ecosystems if you want to do advanced terminals, smartphones, tablets. A great place to do that is San Diego.

So we opened a big facility in San Diego. If you want to do cellular wireless — Chicago; Ottawa; Bridgewater, N.J. — great places to do that. Our biggest sites are actually in Santa Clara, where you have this — ecosystem where you can almost find any technology within about three miles of our facility. So it was a very conscious decision to say that there are clusters of intellect within the North American market, and instead of trying to assume that you can bring them to you, it was better for us to go to them and attract them into the organization.

Ina Fried: And I understand that you guys — your chief recruiter — you owe a big debt to Larry Ellison?

John Roese: Well, we actually kind of find it very useful when there’s mergers and acquisitions and consolidations. So when Sun and Oracle combined, we found a lot of people at Sun that basically wanted to rethink where they wanted to work. Sun is a fantastically innovative company, as is Oracle, but the cultures are different. So it was a great boon to us that we were able to be down the street, and be growing very rapidly, and have this idea where people could take their ideas and turn it into actual reality. By the way, we did the same thing up at Ottawa. When Nortel kind of disappeared, one of the things that happened very quickly, en masse, some of the top technical experts in Nortel just kind of walked across the street to a new facility while they opened, and joined the company.

Ina Fried: And that’s how you came to the company, right?

John Roese: Well, I was a little bit later than that. Actually, that team, most of them who worked for me came into Huawei, and then I was kind of off doing other things, and then as we decided to scale it, I guess they gave me a good reference and they say, “Well you should go attract this guy because we liked working for him, he built a good innovation culture and maybe can help you take it to the next level.”

Ina Fried: And talk about that: What was your thinking, how well did you know Huawei when they first approached you? I mean, obviously, some of your former workers were there. What were your concerns? What excited you about it?

John Roese: Well, I think most people, to quote my former neighbor up in Ottawa, the mayor of Ottawa — Larry O’Brien, at the time — he opened the R&D facility for us up there, and his comment was, “Huawei is the largest company I’ve never heard of.” And that was very common in our engagements. And for me personally, I knew about Huawei, I had competed with them, I even tested their technology to prove whether or not it worked and whether it was a real threat, and learned very quickly it was a very real threat to companies like Nortel. But for me personally, I had kind of checked out of the industry after Nortel. I said, four Fortune 500 CTO roles, it’s time to go do something else, I’ll go to that Ph.D. in cultural anthropology.

But then I started talking to Huawei. I saw some of my best and brightest people — people that were Nortel fellows — come into the company, and as I got talking to them, when I came over to SenJen, when I met with the management team, when I met with the folks that were running the company, what I realized is, this is one of those companies that actually truly values technology; understands that you have to invest heavily into it and was genuinely excited about, not what happened yesterday, but what was going to go in the future. For me, as a technologist — every technologist, any engineer — the most valuable thing you can do is take an idea and turn it into reality. It’s not about making money, it’s not about prestige, it’s about turning your ideas into reality. When I saw this engine here, and this desire to innovate into the future, it was just a complete no-brainer to join.

Ina Fried: Now, you talked about building your organization one person at a time, and part of the reason why Huawei has built its organization in the U.S. one person at a time is because the U.S. government won’t let you acquire just about anyone. You guys have tried a couple times. How challenging is that, in a technology industry that is largely built by acquisition? You came from Broadcom; they gobble up a dozen companies a year.

John Roese: No one will accuse government policy of preceding the technical ecosystems and industries. It usually is a couple generations behind. So the current status of our relationship with the U.S. government is really that we’re a bit out of sync. In most of the industries that we compete in right now, the industries have been highly globalized. If you wanted to build a wireless network today in the U.S., your choice of vendors would be, let’s see, a Swedish vendor, a Finnish vendor, a French vendor and two Chinese vendors. Those are the tier-ones. There’s no North American vendor that can build that for you. The last one was Nortel; it’s not there anymore.

So part of our challenge is educating the U.S. government, educating the politicians. And not just the U.S. — around the world — that we’re in a highly globalized environment, the innovation has shifted, the structure of the industry has shifted and there needs to be a rethinking of how public policy and governmental policy relates to understanding a technology and its application and networks.

Today we build the networks for 45 of the top 50 operators in the world. The remaining five, a chunk of them, happen to be in the U.S. And so we’re very patient. Candidly, we’re now engaging very heavily, we’re dispelling myths on a regular basis, and it does make my life a lot more difficult. In fact, some of the U.S. government people made that comment. They said, “We applaud what you’re doing because you’re hiring lots of people in the U.S.” And we’re exporting $6 billion of goods and services into our global supply chain out of the U.S., we’re a great corporate citizen. But we kind of have to get in sync between the public policy and the actual reality of the industry.

Ina Fried: And what do you think it is? Because, I mean, you mention all of your competitors are global, non-U.S. based companies, is it xenophobia, what is really fueling this fear, and are any of the concerns legitimate or are they all fear-based?

John Roese: Well, I think I would say none of the concerns are legitimate in the reality, but perception is sometimes reality in people’s minds. So the punch line is, some people still think the industry that we exist in is the Bell Labs and the Lucents of the past. So, again, we do have to educate them about this future. The second is an unknown. My comment about Larry O’Brien — I mean, the biggest company he’s never heard of. Well, if I went and polled people in Washington, every senator and congressman, and asked them, “Do you even know how to pronounce Huawei?” — the answer would be, probably not. So we have to engage.

There’s an interesting thing: It’s a $30 billion company; our definition of an emerging market is the United States. So when a U.S. company comes into China, there’s a big educational process to kind of convince people that the company is legitimate, it can provide goo technology, it can be a good partner. And so it’s really just a systematic process of getting them to understand the reality. It doesn’t hurt now that we have a highly globalized workforce, that we have a big presence in the U.S., that we’re not in front of them and dialoging and being present. But more important, the thing that will ultimately overcome this is innovation. There is — you can prevent or avoid certain companies, until the technology they develop is so far superior to what you have at your disposal currently, that it creates a competitive disadvantage. And we believe, given our investment in innovation, that we are almost at that point. In many places ,we are clearly out innovating our competitors, and it just is sound public policy to let the carrier infrastructure of the United States — or the terminal industry or the enterprise industry– use the best technology to solve the best problem, because the correlation between global development, economic advancement, user experience, is entirely tied to using the best technology.

If I told you you couldn’t use any state-of-the-art tablet because I didn’t like the country of origin, and you had to go back to using a typewriter, would you do it? Of course not. We’re not quite there yet, but I think that will occur.

Ina Fried: So I want to turn to one of the topics that’s near and dear to my heart — and certainly to much of the audience — which is this mobile revolution. You guys are playing in that in several areas. You’re building, as you mentioned, the gear that a lot of these networks run on. Perhaps not the ones that I get to use in the States, but a lot of the other networks that I use when I travel, as well as, increasingly, some of the devices. And one of the areas that Huawei and ZTE and a number of Asian companies are making huge influences, democratizing these smartphones. Can you talk about the world you guys see, with smartphones everywhere on the planet?

John Roese: Absolutely. We’ve been through this before. A long time ago, Huawei decided that cellular technology — mobility — should be everywhere. And at that time, most of the big players said it wasn’t cost effective to build cellular networks that could be deployed in sub-Saharan Africa or in the developing world. Huawei was one of the few companies that said, “No, no, no — we need to figure out how to do this.” The result was skipping of generations, massive penetration, and today we have a couple billion people sitting on our networks, which is a good step.

Now we’re in a different phase. The different phase is now that you have these mobile networks, there is still a bit of a have-and-have-not world, and that is the smartphone versus the feature phone. I think the day before yesterday somebody mentioned, “Would it be great if there was $100 smartphone, or something better than that”? Well, there is, we build them. In fact, in the U.S. right now, you could go purchase — there are commercials on television from some of the tier-two operators. They’re our customers that essentially are describing $29 Android smartphones, Huawei-branded, no contract, no commitment.

Ina Fried: Now, does that mean you’re building a phone that costs less than $29 to make?

John Roese: Well, the economics are slightly different and more complex, but clearly they’re in that strata of the sub-$100 smart phone. The advantage of that is, once you get rid of this concept of feature phone/smartphone, that everybody has a mobile broadband device, everybody has a media-capable device — think about the capability that can unlock. I mean, I think Vice President Gore mentioned this concept of five billion people on mobile networks, and less than one billion on smartphones. Well, as soon as everybody is on smartphones, every interesting piece of technology you saw here over the last couple of days is contingent on having an interface that can actually do media, can do data, can be fully interactive. There is a huge opportunity, and the democratization of smartphones — which is clearly our message — we are absolutely trying to make sure that wherever there is a mobile user, they are a fully featured mobile user. That has a huge, profound impact; not just on the mobile networks and the devices, but all of these very interesting, over-the-top applications, cloud services and other things that are contingent on a better terminal and a better mobile experience.

Ina Fried: That growth you mentioned is also contingent, of course, on having networks that can handle that capacity; having enough spectrum. How much time does your organization spend looking at solutions? It’s great to say, wouldn’t it be great if the whole world has smartphones. I think we’d have a problem if any country went to 100% penetration. Data networks are struggling today. How much of your time is spent looking at that issue, and what are some of the things you guys are looking at?

John Roese: A huge portion. I mean, the good news is, I did a calculation a couple of years ago to say, how well have we executed as an industry in improving the bandwidth efficiency of networks — and this was wireline networks. But over a 20-year period, we had improved the cost-per-bit ratio by 22 million to one. That’s a pretty good ratio, if you will. We are very good, as an industry, at figuring out ways to increase the available bandwidth. Now the challenge is, it gets a lot harder when you have to deal with laws of physics, when you deal with things like Shannon’s Law and channel bandwidth. And so we are spending a huge amount of time. Given the composition of my organizations and the people in the organizations I run, they’re all advanced technologists and they’re the place where we are exploring not just how to make it more spectrally efficient, but how do we architect the cellular network. Instead of having these big monster cell sites all over the place, move to heterogeneous networks that have multiple tiers and multiple devices and ways to access, different kinds of networks to interface with, spread the spectrum over multiple spectrum channels.

At the same time, we go and lobby very heavily to get the digital dividend, free up spectrum, increase spectrum. That’s a very precious commodity. But more importantly, think about ways to use that spectrum efficiently. Now, most people don’t understand that a lot of the inefficiency in the network is based on the way it’s designed, and the fact that things like the modulation rate degrades as you move away from the cell site. If you can fix that, then the efficient use of spectrum can improve dramatically. Those are the kinds of things that we keep working on.

I actually have a very high degree of confidence that, contrary to public belief, we’re going to run out of capacity on the cellular networks. I think our industry is actually quite good at figuring out ways, creative ways, of improving that cost per bit of the available spectrum or the available capacity of the network. Occasionally we hit a wall, but usually we figure out a way around it. We innovate, we come up with a new approach and we continue to provide that kind of foundational attribute, which is capacity for people to connect.

Ina Fried: I want to get to questions in just a second, so definitely be thinking of them. But since a lot of people don’t know Huawei, and don’t know what you guys do, take us through the labs. What are some of the coolest projects that you can talk about, that you guys are working on? What are the things that you could tell your cousin, and they’d be like, “Wow?”

John Roese: Yeah, absolutely. So, one of the most interesting ones that I’m really excited about is cloud. So everybody knows the term “cloud”; the problem is, it’s kind of cloudy — we don’t actually know what it really defines. But right now, there’s kind of two schools of thought about cloud. There’s this idea that cloud is just a virtualized data center, and it doesn’t really change much; it just makes things slightly more efficient. And then there’s this very disruptive model that people like Amazon and Google have been focused on, which is, let’s just rethink things like storage and compute and really change the economics so that we can kind of give storage away for free and make it up on advertising. So they had to really rethink how the world was created, in terms of some very foundational components like storage and compute.

So we have a huge amount of projects. I think today we have almost 2,500 engineers across Huawei working on cloud-based projects; which, by the way, is bigger than the total R&D staff of most of our competitors in many markets. But most importantly what we have to acknowledge is, the thing that we have to build is not just a minor iteration of the historical data center, but we have to actually take what people like Amazon and Google philosophically have created, which is a radical rethinking of storage and computing, and turn that into commercial offerings.

We are just about to start trialing and putting out technology to show some of these technologies. But imagine an environment where the cost of storage could be one-tenth what it is today. And you do that by delayering and stripping out a ton of technology so that it’s just very simple architecture, very well-architected and orchestrated. If you change the cost of storage fundamentally for a carrier or for a consumer, for an enterprise, what is the implication of that? Everything. You could change your business model; you can no longer worry about, you only get one gigabyte of storage for your email or don’t make those big files because I don’t have anywhere to put them or be concerned about the cost of those hard drives, or the backup is too complex. If you can get rid of all of that by just changing this fundamental component of the cost of storage, it cascades through every one of these ICT ecosystems. So we call that single cloud, it’s a piece of our overall cloud architecture; and, candidly, I think it’s going to be one of these very big disruptions in the overall industry. Beyond that, obviously we’re doing stuff in everything you could imagine, next-generation wireless. Imagine, if you’ve played with an LTE network today, it’s pretty exciting. A 30-millisecond round-trip time, a 20-30 megabit per second of realistic bandwidth; the theoreticals are much higher. The stuff we’re working on pushed the envelope up to hundreds of megabits or gigabits per second over the wireless environment.

Now, it’s hard to say what you do with that. But I have no doubt that creative people will find a very interesting thing to do with gigabit wireless.

Ina Fried: Really fast dropped calls.

John Roese: Well, it’s funny, I was just at MIT last week, and they were showing me holographic video. I asked them a simple question: How much bandwidth does this take? And they said, “Well, basically it’s the equivalent of a whole bunch of high-definition channels combined to create this three-dimensional, high-definition visualization.” So they were talking hundreds of megs or gigabits of capacity to do holographic video. We think holographs are kind of neat, and they’re interesting. I’ve heard it come up a couple times in the last couple of days. But to move that over a network, we’re going to have to rethink and redesign the networks, which might be one of those first applications, but even if that isn’t the one, I have no doubt people will figure out what to do with it.

Ina Fried: Even making Netflix cost-effective. I mean, their pure data shows that right now we’re not in that place where it’s really you can get Netflix for $7.99 a month, but the cost of delivering a movie is approaching that same rate.

Moving on now to the Q&A with the audience …

Q: On this topic of spectrum and bandwidth, we actually had Mr. Gore here mention that one of the main challenges that the networks are facing is video delivery, broadband delivery; this is definitely one of the drivers. And if that’s an issue not only over typical wired networks, it is only more an issue if every single one of us started to want to stream video or these other high-bandwidth applications over the networks. It’s a significant challenge, which as I understand it, faces two very serious walls, which you’ve alluded to. One is the physics itself. And the second is a political wall. As an example, in Europe, one of the issues is you have a lot of small countries and space; they have to divide the spectrum in ways that are actually very, very inefficient and leave very little spectrum for a given country. So my question is, is this actually really a technical problem, or is it more of a political problem that needs to be solved, that will allow us to get that kind of bandwidth necessary?

John Roese: Yeah, well it’s a great question. I mean, the bottom line is, yes, there’s clearly a political piece to the equation. If you carve up spectrum in funny ways, or you decide that it can only be used in certain ways — like frequency division duplexing versus time division duplexing — these create an unnatural burden. Spectrum is a spectrum; it’s just a segment of the airwaves. We’d like to see a little more rational spectrum policy. Clearly it’s improving, and people I think, now — definitely the FCC, and around the world — are really thinking about how to free up spectrum. But it just takes quite a long time to actually accomplish that. But don’t underestimate the technical problem. There is clearly a technical problem that needs to be solved. You cannot take a network that was historically designed to move very low-bit-rate voice calls, GSM and SMS, and suddenly assume it can be an ultrabroadband wireless delivery vehicle for high-definition video, without really rethinking not just how you do things like modulation on the cellular side, but also how you design the network. And so, that heterogenous networking model, which I think is where most of the action is going to be for the next several years, starts to say, well maybe we should redesign the way the network works. Instead of having one tier, let’s have two tiers, let’s have small cells, let’s spectrum up in the 5- and 6GHz range in coordination with 700 megahertz spectrum.

Imagine a device, five years from now, that’s always connected over a 700MHz channel. So it’s got long range, great building penetration, it’s kind of the control channel — that’s where the important stuff flows. But it’s seamlessly able to invoke additional radios when it’s nearby a small cell, that gives it 100MHz wide channel, 4×4 MIMO, so it has a gigabit of capacity potentially to consume video. So those are all theoretically possible. There are technologies that can be built that way, but the design of the network is very different. It means that now you have to start putting those small cells somewhere; you have to decide that it’s okay to put them on light poles or on building walls, and if we have to have a permitting process that says it takes six months and $10,000 per site to get the permit to hang something on a light pole that just is a small cell in the second tier, that’s just not going to work. So you’re absolutely right, both are important pieces of the equation, both are resolvable, but if you just solve one without the other, it probably isn’t going to get us there.

Q: I have a question about Huawei and potential market share and mindshare in the U.S. One thing that I found really disrupting recently was, Google has shifted Chromebooks with an allocation of Verizon data for free each month. And I think that model is — it’s an incredible model, and I think if you were to put it on lower in phones, you could get people to dig in to this data so that they would see the value of it and want to purchase it, but it’s hardly anywhere. I’m just wondering if you have tried this in any markets around the world, and if you think that this might be something that would be disruptive enough to get traction in America? Because there’s no one offering that.

Ina Fried: So the drug-dealer model — the first hit is free. [laughter]

John Roese: Yeah, we’d rather not use that analogy, but generally it’s not us that are going to create that model, in the sense that it’s the carrier that ultimately has to decide what makes economic sense. Now, the good news is that carriers are now more and more engaged with us saying — they used to think of Hauwei as kind of a supplier of technology that kind of kept the other suppliers honest. That’s when we were in the fast-follower mode. Now that we’re the innovator, the dialogue we’re having with customers is fascinating. So I think you’re on to something, and I think that there are markets where the carriers are looking for ways to increase the penetration rate. And I think now Huawei has an opportunity to actually describe new business models, and the carriers are much more willing to listen to us, because they view us more as an innovator. So I haven’t had that discussion especially, but I’m pretty much, on a weekly basis, sitting down with either CEOs or CTOs or the operators.So maybe the next one, I’ll bounce it off of them and see what they say. I think it’s a great idea, and there’s many other examples in the enterprise world where we’ve done that as an industry and it has worked really well. Get people excited.

Cloud storage is a great example. Give them the first 20 Gb, and see what happens. If they like it, they’ll buy more.That’s what Picasa does, that’s what many of these systems do. You’re absolutely right, it needs to be applied to other markets.

Q: I have a question about your intellectual property strategy. Traditionally, IP is still a little bit of a stigma over here, especially in China. But Huawei has a very impressive IP strategy, so I want to know how it is received internationally, and how it compares to when you were at other international companies.

John Roese: I think you’re absolutely right. The perception is that intellectual property isn’t important. Some companies historically — Huawei, seven or eight years ago — said, no, this is really important. And in the last couple of years we’ve been in the top five intellectual property producers in the world, in all industries — a couple of the years we were, I think, number two. Today we have about 50,000 patents PCTs and patent applications globally. So, my — to answer your question very briefly, compared to Western companies I’ve been CTO of, in fact the patent portfolio is larger and the discipline and desire to create it and the willingness to invest in it is absolutely higher in Huawei. They get it, they understand it and I think realize that intellectual property is a critical part of actually being able to compete in the global marketplace.

Q: It seems like on the one hand you have Moore’s law, giving us faster and faster devices capable of consuming bandwidth, and new business models springing up to accelerate that consumption. On the other hand, you have networks struggling to provide enough spectra. I’d like the answer of, well, technology is going to find a way, but do you think that a period of just real latency is almost inevitable at this point, and if not, do you see solutions coming from outside the network world, like smart flash to do caching, to smooth peak times?

John Roese: Absolutely. The solution to these problems will not be just more bandwidth in the network. That’s a great vehicle. I joke that I’ve been in this industry long enough that we go — we oscillate as an industry between finding really long-term solutions to problems by looking at the end-end ecosystem technically, to moments of time where suddenly the network provides more bandwidth, and we think that you can solve every problem by just throwing bandwidth at it. We’re right now approaching a point in wireless where we can’t just throw bandwidth at it. LT is going to give us a bit of a bump, but it’s a bit more time before we get to LT advanced, and in between there, we will have to get very creative on content management, caching, dynamic transcoding, the intelligence of the endpoint, multi-tiered topologies — those are not cellular problems. And so, you’re absolutely correct, which is great for Huawei, because we actually touch all of those, as opposed to only having one tool to solve the problem.

Q: And do you think that’s going to result in an inevitable period where there’s just going to be a lot of latency?

John Roese: I think it’s going to slow things down in certain markets and certain business models, where the assumption of unlimited bandwidth in all environments is true. But you look over the last 20 years, and it has always gone through those cycles. I’m an optimist, I’ve seen us work through them before. The technical work to solve it when you’re in those “periods of latency” is much more complex. And then eventually we have a breakthrough on bandwidth capacity and everybody kind of breathes a sigh of relief and rapid innovation occurs. And then we do it to ourselves again. It’s inevitable.

John Roese Session Photos

I was on the phone with its two founders: Alon Maor, CEO; and Dan Sahar, VP of marketing. They had just started telling me about how they plan to sell network appliances that network operators — like, say, Comcast or Time Warner or Verizon — might put on their network in order to help them meet the growing demand for video content. The aim, Maor told me, is to get the most popular content as close as you can to the customer.

The first thing that popped into my mind was creating an appliance that sits on the network; close to, but not in the customer’s house. Maybe in the nearest network hub or central office. It turns out I was right. Then I wondered aloud what Qwilt might be using as storage technology. Could it be, maybe … flash memory? The chips that have so revolutionized the data centers of companies like Facebook and Apple and the banking systems of Credit Suisse, among others, when put to use by the likes of Fusion-io and Violin Technology?

Why yes, it does use flash memory, they told me, making them the latest member of the steadily growing “Flash Madness” club, which gives me yet another excuse to use the image taken from the cover of Flash Comics #1, circa 1940. For reference, the other members are Fusion, Violin Memory and Pure Storage.

Maor and Sahar laughed on the other end of the line at my guesses. “Would you like a job in our engineering department?” Sahar kidded me. I didn’t answer, because I wasn’t done guessing things like how Qwilt does what it does. “You must use some kind of algorithm to figure out what’s popular,” I said. Right again, mostly. The interview hadn’t been going for as much as five minutes, and I hadn’t even asked a single question and pretty much had it all figured out.

Well, not everything. There was the small matter of funding. Qwilt has raised $24 million in two rounds from Accel Partners, Redpoint Ventures and the Crescent Point Group, a fund based in Singapore. Maor is a Cisco veteran who got absorbed into that company following its $200 million acquisition of P-Cube. Before that, he was an engineer at Seabridge, which is now known as Nokia Siemens Networks. Sahar was director of marketing at Crescendo Networks, now part of F5 Networks. Tom Dyal, a Redpoint partner, is on Qwilt’s board.

Video is so popular with consumers that Internet services providers are struggling to get their networks scaled up to meet the demand, Maor says. The traditional way to solve that problem when everyone is watching the same show on Hulu, or the same movie on Netflix, is to just add routers and pray. That’s expensive. What if you could add some extra piece of gear that works with the existing network infrastructure? If you could figure out what was the most popular show in a particular neighborhood, make a copy of it right in that very neighborhood, and deliver it from there rather than all the way back from Hulu’s or Netflix’s data center, you’d lessen the network’s burden.

So that’s exactly what Qwilt does: It has three patents pending on processes for determining what video applications are being used on a network, and for figuring out what content is most popular in a particular area. So if you’re in a neighborhood full of “Jersey Shore” fans, the Qwilt box would figure that fairly quickly, and keep copies of it close at hand so that everyone gets their required daily dose of Snooki.

Also on Qwilt’s board is Rich Wong of Accel; Peter Wagner, an independent board member who has previously worked at Accel; Ohad Finkelstein, a partner at Crescent Point; and Giora Yaron, the former chairman of Mercury Interactive, which is now part of Hewlett-Packard. Also investing is Rob Glaser, the former CEO of RealNetworks.

Got all that? I told you it was an easy interview.

Alan Cohen, Cisco’s vice president for Enterprise and Public Sector, has agreed to join Nicira as its vice president of marketing. Cohen has more than 20 years’ experience in tech marketing and product management. He’s been on Cisco’s team since 2005, when it acquired Airespace, a maker of wireless networking switches, where he was VP of marketing. His resume includes stops at IBM, the old Baby Bell phone company US West, Tahoe Networks, Coopers & Lybrand and the U.S. Department of Energy. He’s a grad of the New York University Stern School of Business and American University.

By my count, Cohen will be the seventh person connected to Cisco in some way to join Nicira’s senior ranks. Nicira, which is backed by a $9 million investment from Andreessen Horowitz and another investment from VMware founder Diane Greene, is working on technology aimed at “virtualizing the network.” Its CEO is Steve Mullaney, a veteran networking executive who has worked at Palo Alto Networks, Shoretel and Cisco Systems. 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.

Cohen’s LinkedIn profile also says he spent nine years as a director of the real estate concern General Growth Properties. He briefly sat on the board of flash memory start-up Violin Memory until Cisco’s archrival Juniper Networks invested in that company earlier this year.

As a Cisco VP, Cohen may have been barred from being a director of a company that Juniper invested in, but now he’ll be working with some Juniper alums. In January, we reported that Nicira had hired Rob Enns, Juniper’s former VP of engineering.

The big maker of networking equipment, which had repeatedly predicted that revenue could grow 12 percent to 17 percent a year, set a new target for annual growth over the next three years of 5 percent to 7 percent.

“We want to be conservative and set realistic goals that we can achieve,” said Frank Calderoni, executive vice president and chief financial officer, during a meeting with financial analysts here.

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“Going to China” is a trend we began to see among start-ups early last year, and it has picked up considerable momentum since then. Given the track record of U.S. Internet companies in China — which could at best be described as “mixed” and, at worst, “disastrous” — one might wonder why today’s upstarts believe they’ve got what it takes to be successful in the world’s largest Internet market. China has an estimated 400 million Internet users today, and will have 750 million by 2015, according to a recent McKinsey & Company study.

From our vantage point, it’s not that American entrepreneurs and CEOs suddenly feel they’ve cracked the code on China. Rather, the Chinese market opportunity has become so large, they simply can’t ignore it. The massive potential rewards of “going to China” now outweigh the massive potential risks — especially now that the U.S. market, with all its recent troubles, is no sure bet itself.

The market potential in China is easy to see when you visit the bustling streets of Shanghai or Beijing. As investors in both China and the U.S., we have our own take on why we think China is rapidly becoming a core strategy for every high-growth Internet company today.

• Growth for Fortune 100 companies is coming from China, not the U.S. (or Europe). Case in point: Mercedes sold more S-Class sedans in China last year than in the U.S. and Germany combined. Mercedes sales in China grew 60 percent last year versus nine percent in the rest of the world. Even if you own large-cap U.S. equities in your personal portfolio, mutual funds or 401K, those companies’ main revenue growth is likely coming from China — and economic growth in the U.S. is hardly assured at this point.
• Incomes are rising in China while remaining flat in the U.S. The Chinese middle class numbers in the hundreds of millions (100-300 million, depending on your source), with household income rising an estimated 98 percent since 2004, according to Credit Suisse Group. Even the bottom 20 percent of households saw their incomes rise 50 percent in the same time period. Contrast this with the U.S., where household income growth has stagnated, barely keeping pace with the rate of inflation since 1990. This flat-line income stagnation isn’t likely to change anytime soon, especially in today’s challenging economic climate.
• The Chinese have money, and they’re spending it. Chinese consumers buy an estimated 12 percent of the world’s luxury goods, growing at a 30 percent clip per year, according to Barclays Capital. Spend a day in Shanghai, Beijing or Hong Kong and you’ll be blown away at the breadth of luxury stores in major downtown areas — and the number of shoppers crowding the shops.

So what does this mean for U.S. Internet companies? It means the same thing it does for Mercedes, Apple or P&G — you simply can’t ignore China anymore.

To date, most success stories among U.S. tech companies in China are enterprise or mobile companies in the Fortune 1000 — HP, Microsoft, Cisco, Intel, etc. Each of these companies has built a $1B-plus business in China, but it took them decades to do so, with many speed bumps along the way.

We can’t argue with the dismal results of most U.S. Internet companies thus far in China — first-generation Internet companies like Amazon, eBay, Yahoo and Google have largely failed in China, and newcomers like Facebook and Twitter have been hampered due to strict Chinese government regulations. But we can highlight a few data points that suggest smart U.S. companies can and will attain success in China in the next five to 10 years.

• Demographics. Internet demographics keep getting better in China. Robin Li, founder and CEO of Baidu, spoke at our 10th anniversary event in Shanghai last November. He pointed out that when he launched Baidu in 1999, there were fewer than 30 million Internet users in China, and the total Internet ad market was worth less than $50 million. Today, Baidu sports a $50 billion market cap and Robin is a billionaire. Today there are more than 400 million Internet users in China. Combine this audience size with the rising incomes mentioned above, and you just can’t get a better audience for an Internet company.

• Market share. More than 70 percent of the world’s virtual goods sales in 2010 occurred in the Asia/Pacific region. It’s no wonder why Tencent, which pioneered the virtual goods market now being replicated by Zynga, generates more than $4 billion in annual revenue from gaming and virtual goods, and sports a $45 billion market capitalization. China’s Internet advertising market is growing at an estimated 50 percent or more per year.
• Platform diversity. In the U.S., Facebook is the go-to outlet for social marketing, accounting for more than 80 percent of the market (though it will be interesting to see if Google+ makes a dent in this over the next 12 months). In China, there are social platforms you’ve never heard of that each have hundreds of millions of users. Sina Weibo (think “China’s Twitter”) has more than 140 million users, more than 50 million monthly actives, and is adding more than 10 million new users per month. YY has millions of users, many of whom spend hours per day on the platform. Last year, YY users consumed more Internet voice minutes than Skype. (Disclosure: Our firm, GGV Capital, is an investor in YY.)

In recent months, several U.S. Internet companies have made their move on China. Zynga recently announced a partnership with Tencent to launch its games in China. Earlier in the year, Groupon entered China through an investment into local group-buying site GaoPeng.com. Both of these companies are going after China a mere two to three years after launching in the U.S. — an unheard-of undertaking just a few short years ago.

Our bet is there will be hundreds more U.S. Internet companies talking about China in the boardroom over the next two years. We’d wager more than 90 percent of high-profile American Internet companies will spend a lot of time, money, and energy to enter China — either on their own or via local partnerships. Many will fail to catch on with Chinese consumers. But for the relatively small percentage of companies that succeed, China will bring massively outsized returns. Internet companies that win the hearts and minds of Chinese consumers are the companies to bet on for long-term growth.

Jeff Richards (Menlo Park) and Jenny Lee (Shanghai) are Partners at GGV Capital, a $1 billion venture capital firm investing in the U.S. and China since 2000. Representative GGV investments include Alibaba Group, Pandora Media, YY, Buddy Media, Tudou, SuccessFactors, Square, and 21ViaNet.

That would be Flip creator Jonathan Kaplan’s The Melt line of grilled cheese restaurants, which was first announced at this year’s ninth D: All Things Digital conference.

It is Kaplan’s next act, after Cisco shut down the Flip handheld videocamera line in April.

Kaplan had actually left Cisco in February, and soon was planning this orthogonal and highly unusual move.

I stopped by The Melt’s first location at 115 New Montgomery in San Francisco on Friday, just after the restaurant had invited its Twitter followers and Facebook fans in for a free trial lunch. Needless to say, the atmosphere was festive.

The sandwich menu has changed since D9. No more The Walt and The Kara, although the “experienced gruyere” found in The Walt has now been relabeled “aged gruyere” and is part of The Wild Thing, which comes on white wheat with creamy wild mushroom soup.

(I sampled “The Mission,” which is jalapeno jack on sourdough, accompanied by sweet corn tortilla soup. I have no professional qualifications or training to assure you of this, but it was yummy.)

Both of the combos I described cost $8.95 each.

The Melt aims to be the cheesier version of Chipotle, the fast, casual and highly successful Mexican restaurant chain, and is backed by Sequoia Capital.

Kaplan said he’s well aware that many in the technology industry are rolling their eyes. But he said, “The reality is, tech gets you food and out the door.”

Thus, customers can create an order for their grilled cheese from their computers or mobile phones and receive a QR code that they then bring to a Melt location and scan at the counter. Only when the sandwich is ready does the customer’s credit card get charged.

Each sandwich takes two minutes to cook, and has a shelf life of about half an hour, Kaplan said, so time is of the essence, and the QR code system helps make everything happen fast.

As for the connection between sandwiches and personal videocameras?

“Flip was also a crazy idea,” said Kaplan. “It was equally nutty to compete with Sony.”

With a restaurant, it’s much easier to get feedback and make quick changes than with a gadget that has to be manufactured and distributed, he noted.

Kaplan said he’s aiming for 500 company-owned restaurants with 20,000 employees in five years.

Two other ways The Melt sets itself apart: Everything served is compostable or recyclable, so you won’t find a trashcan in the store. And the combos contain only about 615 calories, Kaplan said.

Here’s the video of Kaplan at D9:

]]> http://allthingsd.com/20110829/theres-some-cheese-in-my-tech-jonathan-kaplans-the-melt-opens-its-doors/feed/ 0 http://allthingsd.com/20110815/motorola-could-get-google-closer-to-your-living-room-if-the-cable-guys-play-along/ http://allthingsd.com/20110815/motorola-could-get-google-closer-to-your-living-room-if-the-cable-guys-play-along/#comments Mon, 15 Aug 2011 19:24:59 +0000 Peter Kafka http://allthingsd.com/?p=110185 Google wants to buy Motorola because of the patents. And probably the handsets. And, maybe, because of the cable business.

The last part isn’t getting much attention, but Google itself mentioned its interest in Motorola’s big set-top box business during today’s call announcing the deal. And some Wall Street analysts and other observers are making positive noises about the possibility of Google, which has tried and failed for years to make headway into the TV business, to finally make inroads.

Could be! I’m skeptical, though.

A couple basics: Motorola’s “Home” unit accounts for about a third of its revenue. It’s not a sexy or high-growth business — last quarter, revenues increased 2.3 percent — but unlike handsets, it is profitable. Last quarter it generated operating earnings of $67 million on $907 million in sales.

It is also the biggest cable set-top box business in the world. The reason that you, the average consumer, don’t know or care whether you’ve got a Motorola box next to your TV is that you don’t really have a choice — Motorola sells its boxes to the cable and satellite guys, and they turn around and rent them to you. As long as you’re getting pay TV, you’re using a box from Motorola, or perhaps Cisco’s Scientific-Atlanta unit (Cisco is going to stop making the boxes itself, but will stay in the business.)

The reasonable notion is that Google, which hasn’t had much success getting the cable business to work with it in the past, could do so now, via Motorola’s longstanding relationships with the cable guys.

But I don’t think Google hasn’t made progress with the TV business — both the cable providers and the networks that provide them with programming — because the guys from Mountain View can’t get meetings. It’s because the TV business is paranoid about what Google could do if it ever did make headway in the TV business.

The cable guys don’t have a problem working with Motorola, Cisco, etc., because those companies have never shown any inclination to compete with their core subscription business, as GoogleTV theoretically does.

And while the cable guys do want better, cheaper, more powerful boxes — ones they could upgrade without sending out a guy with a truck, which gets very expensive — it’s highly unlikely they’re willing to let Google offer to help them out. Note Comcast’s “Excalibur” project, which in many ways is supposed to be a GoogleTV alternative, controlled by the cable company itself.

And even if Google does make headway in the box business, it’s still going to face plenty of challenges with the programmers who push stuff through those boxes. They’re the same ones that kept their stuff off of GoogleTV when it rolled out last fall.

And while it’s possible Google could change its mind — some big checks might help — I don’t see them getting more comfortable with the notion any time soon.

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]]> http://allthingsd.com/20110815/motorola-could-get-google-closer-to-your-living-room-if-the-cable-guys-play-along/feed/ 0 http://allthingsd.com/20110810/ciscos-profit-drops-36-percent/ http://allthingsd.com/20110810/ciscos-profit-drops-36-percent/#comments Wed, 10 Aug 2011 22:07:56 +0000 Joan E. Solsman http://allthingsd.com/?p=108383 Cisco Systems Inc.’s fiscal fourth-quarter earnings fell 36 percent, though the decline wasn’t quite as steep excluding significant charges and severance costs from restructuring, as the networking giant’s weaker margin offset a modest revenue increase.

The company, which has posted three straight quarters of lower profit on a long margin slide, has been broadly restructuring into what Chairman and Chief Executive John Chambers has called a “leaner and more focused” operation. That included plans announced last month to lay off 9 percent of its work force, as well as a review of its product portfolio for places to cut back. The changes build on similar strokes earlier this year, such as an internal reorganization in May to simplify structure and the sale of the Flip video camera in April.

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]]> http://allthingsd.com/20110810/ciscos-profit-drops-36-percent/feed/ 0 http://allthingsd.com/20110727/juniper-plunges-on-outlook-fears/ http://allthingsd.com/20110727/juniper-plunges-on-outlook-fears/#comments Wed, 27 Jul 2011 21:50:36 +0000 Matt Jarzemsky http://allthingsd.com/?p=103439 Juniper Networks Inc. lost about a fifth of its market value Wednesday, a day after the networking company said economic concerns are pressuring business and government spending.

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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