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Routing

Cisco Keeps the Service Provider Faith

Router sales and service provider revenues are down, but Cisco Systems Inc. (Nasdaq: CSCO) is staying optimistic on the belief that networks can't stand still forever.

At the same time, though, CEO John Chambers continues to say Cisco is using the recession as a chance to shore up its future prospects, particularly in the consumer market.

In reporting earnings Wednesday for Cisco's second quarter, which ended Jan. 24, CEO John Chambers gave a forecast showing sales will worsen for at least one more quarter. (See Cisco's Still Sinking.)

Orders from service providers were down overall during the quarter, with the U.S. being one of the hardest-hit regions. Orders there fell 30 percent compared with the previous year.

Of course, carriers such as AT&T Inc. (NYSE: T) have talked a lot lately about slashing their spending. The results appear to be showing up already in the earnings reports of companies such as ADC (Nasdaq: ADCT). (See AT&T Cuts Capex by up to $3B and ADC Forecasts, Shares Slide .)

Service provider orders were down in most regions but up slightly in Europe, Cisco said.

Table 1: Service Provider Slump
Region Cisco's Q2 Change in Service Provider Orders,
vs. a Year Ago
Europe Up, in mid-single digits
Japan Down 20%
Asia/Pacific Down 12%
United States Down 30%
Emerging markets Down 30%
Source: Cisco earnings call




During the earnings call, Chambers repeatedly noted the unpredictability of this recession. But he's confident that service provider spending will come back, because he envisions carrier networks becoming increasingly filled out with video.

"The service provider budgets are the ones that, probably over the long run, I am the most comfortable with," Chambers said. "You can run your networks hotter, but you have to, at a point in time, continue to spend there."

Router sales during the second quarter were gloomy, down 23 percent compared with a year earlier.

Juniper Networks Inc. (NYSE: JNPR), in reporting earnings last week, noted that pricing was getting tough in every market. (See Juniper's Q4 Shows Worry Lines.)

Cisco challenged that assertion, though. "Our gross margin in those product areas actually were in very good shape this quarter" and might even have been "up slightly," Chambers said.

Cisco's overall gross margin went down, to 64 percent from 65.6 percent the previous quarter, but that's because video systems surged, with orders up 18 percent from the previous year.

Consuming Cisco
Chambers is vocal about using the recession to extend Cisco's reach into new areas, or "adjacent markets," as he likes to put it.

Consumer products is a prime example. During the call, Chambers noted that senior vice president Ned Hooper has gotten the nod to expand Cisco's consumer business to at least $3 billion-a-year in sales.

"I have signed off on Ned's business plan to move to $3 [billion] to $5 billion for his area of responsibility with a chance to get to $10 [billion]," Chambers said.

As shown at the 2009 International CES -- where Cisco claims it got the second most press coverage behind Microsoft Corp. (Nasdaq: MSFT) -- Cisco is serious about making a bigger splash in the consumer market. Acquisitions are almost definitely in its future there. (See Cisco Goes Consumer.)

"You will see us active in all segments of the market," Chambers said when asked yesterday about acquisitions. "In fact, if I were betting, it would not surprise me to see us move on the consumer side before you see us even move on some of the other areas."

(As for why Cisco hasn't jumped on any acquisitions lately, Chambers gave the "no, duh" answer: "The market continued to go down.")

Cisco is working aggressively to cut costs while simultaneously trying to boost the use of Web 2.0 applications internally. Chambers said the company's own use of WebEx is up 3,100 percent from a year ago, and C-Vision (an internal YouTube-like service) is up 2,300 percent. Granted, both percentages are probably the result of small starting bases.

Cisco's travel budget has been slashed to about $350 million per year, compared with $750 million before, Chambers said. He pointed to the company's 4,000 TelePresence meetings per week as a factor. And Cisco is also just plain cutting out some meetings, such as its global sales conference.

— Craig Matsumoto, West Coast Editor, Light Reading

photon2 12/5/2012 | 4:12:28 PM
re: Cisco Keeps the Service Provider Faith SP's were down except for the EU? APAC was up 42% this year in SP routing. Face it, Cisco is getting their butts kicked in NA, APAC and ROW. As much as they discount Huawei, Juniper and ALU, with few new products the bookings tell all.
P2
Pete Baldwin 12/5/2012 | 4:12:17 PM
re: Cisco Keeps the Service Provider Faith Well, Cisco was saying years ago that they expected low-cost Asian manufacturers to start nibbling away parts of the market, so maybe that's starting to have real impact -?

Separately, ALU does seem to have continued its surge. Couple of analysts are supposed to have market-share numbers out soon, possibly even today, so that could be something worth checking out.
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