Cisco Offers Softer Switch, Router Sales

In announcing second-quarter earnings Wednesday, Cisco Systems Inc. (Nasdaq: CSCO) gave some surprisingly low numbers in switches and routers, its primary markets. That surprise may have caused the stock to slip; Cisco shares were down $2.18 (9.9%) to $19.86 in after-hours trading.

Cisco's switching revenues declined 7 percent compared with last year's second quarter, and its router revenues grew 4 percent.

Why this matters
Following its November earnings, investors began to grow suspicious of Cisco and its growth prospects in mature markets. There is a perception that it is losing market share, and now the naysayers have some evidence that not all is well.

That's particularly true in switching. Cisco keeps saying Nexus sales are going well, but the transition from Catalyst switches to Nexus is going "faster than we expected, especially in terms of the ramp of the new products," CEO John Chambers said on Wednesday's earnings call.

In a research note last week, analyst Mark Sue of RBC Capital Markets wrote that while Cisco is still beating the competition consistently, "competitive pricing is shrinking deal sizes, implying there may be minimal revenue growth in switching this year where Cisco is dominant."

For more
A look at Cisco's finances during the past 12 months:

— Craig Matsumoto, West Coast Editor, Light Reading

Pete Baldwin 12/5/2012 | 5:13:14 PM
re: Cisco Offers Softer Switch, Router Sales

Interesting side note -- Cisco is very upbeat about service provider routing. They say ASR 9000 sales are finally kicking in -- up 500% from last year (up from a small base, no doubt, but still way up).  Chambers sounded particularly happy about that.

Pete Baldwin 12/5/2012 | 5:13:14 PM
re: Cisco Offers Softer Switch, Router Sales

Chambers's explanation of the switching surprise is interesting. 

First, he seems to be saying that it's a byproduct of having so many new product families coming out at once.  Too many moving parts, I guess.

He's also saying the customer acceptance of Nexus has been faster than expected, something Cisco missed.

But he's also alluded to -- if I heard this right -- salespeople having incentives NOT to sell the new stuff.  When you take away the architectural differences and look just at stats and prices, the salespeople are apparently (?) better off selling more of the Catalyst switches than a few of the Nexuses.  So, even though Cisco talks about Nexus being well received and growing quickly, it's also got a salesforce that's not willing to upsell customers to the new platforms.

That's my hurried take -- I'll have to re-listen to the call later (no time now due to an appt i gotta meet). If you listened to the call, what was your interpretation?

jggveth 12/5/2012 | 5:13:13 PM
re: Cisco Offers Softer Switch, Router Sales

"what was your interpretation?"

Chambers needs to be carried out by orderlies in white jackets. He clearly needs to be in a padded room, and not just because of that one answer.  He has totally lost touch with reality.

yarn 12/5/2012 | 5:13:11 PM
re: Cisco Offers Softer Switch, Router Sales

Well, ALU IP Sales grew by nearly 60% and that's gotta come from somewhere.

It looks that one of those places is Cisco as their switch and router sales were soft.

BigBro 12/5/2012 | 5:13:08 PM
re: Cisco Offers Softer Switch, Router Sales

They're in a really tough spot.

On the Catalyst side, their cash cow (the Cat6k) is getting really long in the tooth. (When was the last time they introduced a new sup for that thing, again?) It tops out at like 3 non-blocking 10G ports per slot, and those ports are sinfully expensive. The platform has had a fine run over the decade-plus that it's been on the market... but it's fundamentally a 1G platform, and the time has come to move on.

The new Cat4k is pretty much just as capable, if you need all the wiring closet features/bells-and-whistles.

If you need raw performance without features (think lots of 10G ports), then you could go with a Nexus. Problem (for the sales guy) is that a single Nexus will replace a pile of Cat6k/Cat4k (again, if you don't need the fancy features), which means his deal gets a lot smaller.

So the sales guy has a choice between continuing to push the Cat6k, especially to existing customers ("Familiar software, common sparing, proven architecture, yadda, yadda, yadda..."), or spending the effort to try to "upsell" to a Nexus, with brand-new software, fewer features, and way higher per-unit cost... but higher raw performance, so a single unit replaces a whole lot of Catalysts. Oh, yeah, you could try to push FCoE, but it's pretty clear that's not ramping anywhere near as fast as Cisco had hoped.

Add to that the competition in the Nexus class from companies like Arista, BNT, Brocade, Force10, and Juniper (most of those boxes do L3, BTW!), and it makes the sales guy's job really hard...

It's going to be tough sledding for Cisco for a while... The question is whether this product transition gives one of the new competitors a foothold in switching, similar to what Juniper managed to pull off in routing in the 90's...

maximtuliuk 12/5/2012 | 5:13:01 PM
re: Cisco Offers Softer Switch, Router Sales

Graig, a few years ago most of ISPs understood that now it's time to upgrade his routers/switches. But in that time Cisco solt only old GSR/7600s as routers and 6500s as switches and promised, promised, promised...

So companies spilt on 2 groups: 1st was looking for another vendors, 2nd was waiting for new boxes. Now 1st group has successful stories with Juniper MX960/Alcatel 7750 as routers and Brocade MLX as switches, 2nd has just got 500% sales for new Cisco boxes.

However, 1st group NEVER came back to Cisco because they're totally satisfied with price/support/perfomance from new vendors i.e. ASR and Nexus isn't enough to become "Vendor N1 on routing/switching market"

It's what I saw inside ISPs

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