Cisco's Half-Empty Glass

6:45 AM -- What's not to like about Cisco Systems Inc. (Nasdaq: CSCO)'s second-quarter earnings? Plenty, actually. Maybe that's why the stock was down 43 cents (2%) at $20.00 on Thursday.

Cisco has its swagger back, as the company made clear on Wednesday's earnings call, but it's still facing the same downer economy as its peers. In a sense, Cisco is being rewarded not for being awesome but for being less mediocre than expected.

According to Thomson Reuters , analysts think Cisco revenues will grow 6 percent in fiscal 2012, which ends in July. That would follow years of 6.9 and 3.9 percent growth (2011 and 2010).

For a bad year, that might be nice. But by itself, it's not really a sign of strength.

Cisco also saw product orders slow, growing 7 percent in the second quarter, which ended in January, compared with 13 and 11 percent in the October and July quarters. That "raises concerns about the near-term outlook," analyst Mike Genovese of MKM Partners wrote in a research note late Wednesday night.

Taking market share from Juniper Networks Inc. (NYSE: JNPR) would be a reason to be happy -- but that might not be happening. Juniper's router sales did drop 21 percent in its fourth quarter, while Cisco's grew 11 percent. But that might be a one-time glitch.

"Juniper is massively over-indexed to AT&T Inc. (NYSE: T) and Verizon Communications Inc. (NYSE: VZ) relative to Cisco. AT&T and Verizon, of course, were exceedingly weak [spenders] in Q4," analyst George Notter of Jefferies & Co. Inc. wrote in a report issued Thursday.

So, core router numbers might be skewed by plain old coincidence. Combine that with Juniper's decent edge-router performance (9 percent growth), and it's unlikely Cisco is actually taking Juniper's customers away, Notter wrote.

Actually, Cisco's real market-share gain might be elsewhere. Analyst Ed Zabitsky of ACI Research thinks Cisco "won a huge core router deal at China Telecom Corp. Ltd. (NYSE: CHA) through aggressive pricing," as he wrote in a brief earnings preview Wednesday morning. The resulting boost in CRS-3 sales was enough to heat up Cisco's numbers in a frosty environment.

You can't blame Cisco for going on the offense, especially with competitors talking about slow service-provider spending. But not all the numbers inspire confidence, and product gross margins -- reaching a new low of 60.9 percent -- will be something to worry about for a long time.

Cisco deserves a lot of credit for turning around its fortunes quickly, but it's not all the way back yet.

— Craig Matsumoto, Managing Editor, Light Reading

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