But after a major company-wide restructuring and the divestiture of several non-core businesses, CEO John Chambers (pictured here at D5) is finding that turning the massive Cisco ship around — something he seemed to have started two quarters ago, and which continued last quarter, isn’t coming easy.

There’s the global economy to worry about. All that messy complicated news coming out of Europe about sovereign debt and cuts in government spending around the world has a way of eating into technology budgets both at Cisco’s government customers and at its large enterprise customers.

Cisco’s guidance for the quarter ending in July was especially worrisome for investors, who promptly sent Cisco’s share price plummeting by more than 8 percent in after-hours trading. Cisco called for revenue to grow between 2 percent and 5 percent, which works out to sales in the range of $11.4 billion to $11.8 billion, well off the consensus forecast of $12 billion.

Guidance on earnings was equally disappointing. At 44 cents to 46 cents a share, the midpoint lags the consensus by two cents.

So what’s going on? I asked Chambers about it in a phone interview with AllThingD held after the conclusion of Cisco’s conference call with analysts.

AllThingsD: John, the markets clearly don’t like very much what they saw today. So, from a high level, what happened — good, bad and indifferent — with this quarter?

Chambers: The first thing from a high level is that we’re executing pretty well on our vision and strategy, and we did exactly what we said we would do. We guided for growth of 5 percent to 7 percent for the year and for the first nine months we’re at 7.5 percent [revenue]. We said profits faster than revenues, and we’re at 9.5 percent. Earnings per share increasing 13 percent year over year for the first nine months and gross margins down just 1 percent primarily on product mix. We’re winning versus our key competitors and winning at a pretty fast rate. When you’re number one or two in most product categories, holding your own in switching and making it very challenging for the Huawei’s of the world, the Junipers and Hewlett-Packards … Juniper and HP we’re pulling away from and we’ll see if we can maintain it. Huawei, for the first time we’re getting much better and competing against them and understanding their weaknesses. And if you look where we are in terms of the bigger picture, we’re in the right markets. We’re in the mobility market. We’re in video. We’re in the cloud market. We’re in the social networking segment. We’re pulling them all together, and our customers are buying the architecture in a pretty good amount. Even in service providers, where most people thought they would never move toward having preferred vendors, we’re seeing something close to that at some service providers and at many of them they are starting to think about going all-Cisco.

So on things we can control and influence I think we’re in pretty good shape. In terms of the market, I’d like to add another couple of points [of growth] in service providers, another couple of points from commercial customers. The public sector is at 3 percent. I’d take that for the year, but we think it’s going to be flat, give or take a couple points.

The issue is the enterprise. And there the problem is not that they don’t have the money or that they don’t understand that it’s important to get productivity. It’s that they’re uncertain. When they are uncertain, that’s because of economic issues primarily because of Europe. And uncertainty on government policy. Then you see people deciding not to invest. And that affects not only capital spending but jobs.

So I think the market understood what we’re saying and I think most people would give us credit for being a very good indicator of what the point in time change is. But this is not necessarily a given for what is going to happen in the second half of the year. I’m just trying to be as transparent as I know how.

The July quarter is usually your seasonally strongest. Given that your guidance was relatively weak compared to the consensus, what are we to make of the quarter coming up? Is it a secular weakness or mostly the economy? Are your competitors just taking it on the chin worse that you are?

Let’s look at Juniper. It’s down 6 percent a year and routing down 9 percent. Huawei is growing 11 percent a year, but its service provider segment is growing only 3 percent. HP’s networking business is back to the levels in their switching business to what they were when HP first bought 3Com. There’s an explosion in the data center business, it’s to the point that companies who have been there a long time like IBM or HP, we’re growing 67 percent and their servers are flat or slightly down. So the results speak for themselves in terms of what we’re doing right in some areas. But we’re learning to tie things together in a way that saves customers money, saves them time to market and allows them to achieve their business goals quicker. That is the game we’re playing for. The major thing we’re after is getting the enterprises spending again. Customers — almost uniformly — are saying that my business is okay, not great, they expect it will go up gradually, and that they’re probably going to spend more in the second half of the year than they did in the first. But immediately as a follow-up to that, they all say that’s true only if they’re not surprised by something from the economy. That’s the kind of uncertainty we’re seeing, and in talking with my peers in the industry who are in similar markets, they can finish my sentences. The question is whether it’s temporary or is it a blip? We just don’t know yet.

So given the restructuring we’ve been talking about for the last year or so, is Cisco the right size? Your overall headcount is down more than 8,000 from a year ago, but it’s up by more than 1,300 since the last quarter. Are you at the right size or are there more changes coming?

Out of the 1,353 people we added, the vast majority were either advanced services or engineers. We needed more engineers. The additions were around either building products or converting services. In terms of our organization structure, we re-did Cisco. We’ve learned from what we did well in the past, and you wouldn’t see the turnaround as quickly as we did if the structure weren’t so strong. But we needed to restructure how our customers buy, and how we build products. We needed to be nimbler and simpler in how we get decisions done. And that is a journey. In the past we tended to get a market transition, good or bad, and take off on a good one or address a bad one, and we would end up gaining market share almost always coming out of these. We’ll see if we do it again this time. But we weren’t constantly reinventing ourselves to avoid hitting the next wall or the next inflection point. That is what we’re trying to do. This is a continuous journey. While we were four or five inches around the waist, I think there’s still more work to be done in our middle levels. I think you’ll see us address that in the next year or two. Does that mean we’re going to adjust the market given that the market may have slowed? I’m not sure it has yet, we’ll know in a couple of quarters which way it’s going. The answer is, not in a major way. It’s too early to say which way this market is going. We’re not going to over-react or under-react.

You just made a major acquisition with NDS, about $5 billion. You still have a lot of cash on the balance sheet. What’s your stance on acquisitions?

Ongoing at Cisco we will do innovation through internal development, including internal start-ups, through strategic partnership, and acquisitions and intergrating all of the above. NDS is one of multiple moves that we will make, not just in the video space for us, but it was also a major cloud play for us and a major social media move if we do this right. It plays right into the sweet spot of our service providers and content providers. Our ideal target has not changed: 100 engineers with a product that is just about to come to market, where our customers say that if they were owned by Cisco they’d buy a lot of it. The $5 billion price is higher than what we’ve traditionally paid, but it’s on the order of Stratacom and Tandberg, for which we paid about $3 billion each. But our ideal target is smaller, and you’ll see us continue to be selectively active in the market.

You’re said to be heavily focused on gross margins. One point that came up on UCS: You say it’s growing like crazy, off a low base, but one of the analysts pointed out this week that it has the overall effect of bringing down the gross margin a bit. How are you addressing that?

That’s true on specifics. UCS by itself, even with a premium versus our peers, is going to be below our gross margin of 65 percent. So, by definition, as you add more of those it has a major effect on gross margin. When you combine UCS with our Nexus 2000 and 5000 switches the blended version gets the margin higher, though still not as high as the overall gross margin. Our challenge on gross margin, and the reason why we’re going to focus aggressively on each gross margin area this year, is that it’s more of a product mix issue than it is an issue of pressure on gross margins on any specific product. In terms of the base for UCS, it’s getting close to a $2.5 billion run rate and probably closer to $3 billion by now. So the base is getting larger, and in North America our market share is close to 20 percent and globally our best guess is 14 percent as best as we can tell. So that’s pretty good execution.

At this point, as he did last time we talked, Chambers asked me what song I’d pick to musically illustrate Cisco’s quarter, sticking with a tradition started a few quarters back and continued last quarter. I told him I wanted it to be a surprise, but that I think he’d like it.

This quarter, I dedicate to Cisco Ringo Starr’s “It Don’t Come Easy.” The hard work of transformation done, Cisco is finding that, despite being leaner and meaner, it has still got some way to go and finds itself in a tough market. In the video below, Ringo performs with fellow Beatle George Harrison at the 1971 Concert for Bangladesh. As everyone at Cisco knows, nothing worth having comes easy.

The good news is that Gartner has revised its outlook upward. Companies and governments will spend $3.6 trillion on IT this year, which is more than the prior $3.4 trillion forecast, amounting to growth of 5.1 percent. Sounds great, right?

Yes, but it’s complicated, especially from the U.S. point of view. The weak dollar makes the figures look a little better than they are. In 2010, Gartner says, IT spending grew 2.2 percent, but more than half of that–1.6 percent–can be attributed to the devaluation of the dollar against other currencies. Companies and governments spending other currencies can get more dollars for their money, and so this tends to inflate the appearance of growth, Gartner’s Richard Gordon told me.

A weak dollar is generally good news for U.S. companies that do a lot of global business. U.S. products and services look more attractive to non-U.S. buyers. But in cases like this, U.S. companies end up paying more for items that get imported and for raw materials.

That’s not to say there isn’t actual growth. Gartner says spending is picking up fastest on telecom equipment, with computing hardware and enterprise software following close behind.

Spending on discretionary items like IT services and consulting is coming back the slowest. When the economic crisis hit in late 2008 and early 2009 these were the first items on the chopping block, and spending on them is only now beginning to make a comeback.

Preliminary registration figures from the Consumer Electronics Association reveal a headcount of over 120,000 attendees. That’s up roughly six percent from 113,085 last year and far more than 110,000 the CEA predicted.

A small, but not inconsequential bump, and one that suggests the industry is indeed beginning to turn the corner.

“The innovations unveiled this week at the 2010 International CES brought new optimism and opportunity to our industry and the global economy,” said CEA president and CEO Gary Shapiro. “This show exceeded expectations with its innovation, optimism and excitement. What a great way to kick off the new decade.”

“As semiconductor sales are increasingly driven by the performance of the overall global economy, our sales are reflecting the improved economic conditions in our world markets,” said SIA President George Scalise. “Sales increased sequentially in all geographic regions.”

Chip makers have kept inventories lean, and the holiday ramp-up in production could be extended by a few weeks, Scalise added.

Great news, coming as it does after the chip industry’s seemingly endless procession of bad. The semiconductor sector is typically among the first industries to recover ahead of a broader market turnaround. This latest report suggests we may be at the beginning of just that or at least at an inflection point where the uncertainty in consumer and enterprise technology markets that’s been such a drag on the industry begins to abate.

Welcome news, considering that back in June, SIA was calling for chip sales to fall 21 percent.

“The new forecast is brighter than our earlier projections, reflecting an improving global economy,” SIA President George Scalise said in a statement. “Unit sales of key demand drivers–including PCs and cell phones, which together account for about 60% of semiconductor demand–have been stronger than previously predicted. We remain cautiously optimistic for the longer term. The current forecast is closely tied to projections of continuing improvement in the worldwide economy.”

Third-quarter chip sales totaled $61.9 billion, down 10.1 percent from the same quarter last year, but up nearly 20 percent from the second quarter of 2009. No doubt about it, the market for chips is improving (see chart below; click to enlarge).

“Global semiconductor sales in the third quarter were above expectations,” SIA President George Scalise said in a statement. “September sales were in line with historical patterns, reflecting increased demand from end-users as they began the build for the holiday season.”

“Amid signs that we are in the early stages of recovery in the global economy,” Scalise added, “semiconductor sales continue to reflect normal seasonal patterns. Sales are running well ahead of the worst-case scenarios projected early in the year, and we are optimistic that total sales for 2009 will be better than our mid-year forecast.”

Sales are running well ahead of the worst-case scenarios? Well, I suppose any reassurance is a good one when your industry is down 10 percent year-over-year.

For its third quarter, the company posted a profit Wednesday that fell 24 percent from a year earlier but still beat expectations. Sales slipped 17 percent. The specifics: Revenue topped out at $8.16 billion, down from $9.79 billion for the same period last year but better than the $8.07 billion analysts had expected. Sales were $8.2 billion, topping analysts’ forecasts of $8.1 billion. Excluding one-time charges for acquisition costs, Cisco (CSCO) earned 30 cents per share, a nickel more than the Street had been looking for.

So, overall, a good report that exceeded expectations with numbers that, by any standard, are pretty damn ugly. “Cisco delivered solid financial performance despite a challenging global economy and period of evolving market dynamics,” said CEO John Chambers. “These results demonstrate our ability to drive operational excellence and manage profitability across varying economic cycles.”

One way of putting it, I suppose. Certainly investors are eating it up. Cisco shares rose on the news.

“We are preconfigured for the downturn.”

– Sun CEO Jon Schwartz, Oct. 13, 2008

Looks like Sun is “aligning its business with the global economic climate” again… The company will sack 1,500 employees this week, a company spokesperson confirmed to Digital Daily. The move is part of the restructuring plan Sun announced last November and will affect “all functions, geographies and levels.”

In January, Sun confirmed that it had laid off 1,300 employees as part of its November plan to cut 18 percent of its workforce. With this latest round of cuts, that number is pushing toward 3,000.

News of cuts comes as acquisition talks between IBM (IBM) and Sun (JAVA) continue, suggesting perhaps that IBM prefers its acquisition targets lean…

Sun’s statement on the matter in full:

Sun continues to make important choices to streamline operations and align resources to best address market opportunity and position the company for improved financial performance and long term growth. In November 2008, Sun announced a series of changes designed to align its cost model with the global economy and accelerate the introduction of compelling open source innovations. As part of that effort Sun announced a global workforce reduction of approximately 5,000 to 6,000 employees, representing approximately 15% to 18% of the Company’s global workforce. In January, layoff notifications were given to approximately 1,300 employees as part of that action.

This week, Sun can confirm that notifications are being given to approximately 1,500 as part of this effort.  Reductions are being made across all levels, including vice presidents and directors. Sun remains committed to its strategy with a consistent focus on providing innovations that enable customers to address their business needs. We continue to see great opportunities for our technologies globally and are focused on our customers and partners.

We will continue to provide updates on our progress against the workforce reduction plan as they come available.

An open-ended timetable for an employee stock sale program.

Perhaps it’s the same “open-ended timetable” Facebook’s using for that mythical liquidity event, hmm? Without a silver bullet business model and no stable revenue stream to speak of, investors were bound to question Facebook’s perceived valuation sooner or later. And, apparently that’s exactly what happened, according to Valleywag’s Owen Thomas. “Facebook’s common shares…have a value that put the whole company’s worth at around $4 billion,” Thomas explains. “Or they did. A source close to potential investors said they wanted to buy shares from employees at a lower valuation, or with guarantees similar to Microsoft’s. To reward a small number of employees who had enough shares to benefit from the program, [Facebook] would have had to give away something for nothing.”

“We had a good third quarter with strong traffic and revenue growth across all of our major geographies thanks to the underlying strength of our core search and ads business. The measurability and ROI of search-based advertising remain key assets for Google,” CEO Eric Schmidt said in a statement. “While we are realistic about the poor state of the global economy, we will continue to manage Google for the long term, driving improvements to search and ads, while also investing in future growth areas such as enterprise, mobile, and display.”

Google shares rose some 8 percent in extended trading following the news.

The company posted Q3 revenue of $310.4 million, with profits of 48 cents GAAP, 53 cents non-GAAP, getting a lift from a lower-than-expected tax rate. The Street had been looking for $310.4 million and 45 cents.

But Linear also warned that orders fell sharply toward the end of the quarter, and that fourth quarter revenue is likely to slide as a result.

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