LAS VEGAS -- Networld+Interop -- Even in the heat here, it wasn’t hard to feel the chill that Cisco Systems Inc.'s (Nasdaq: CSCO) recent quarterly earnings announcement had on the industry.

"Cisco had this aura of invincibility and now that's going away," says Russell Hertzberg, vice president of marketing, Zuma Networks.

In some specific product areas, the perception that Cisco is bulletproof has already been shot full of holes. After his keynote on Wednesday, James Richardson, senior vice president of Cisco's enterprise business, candidly confirmed that his firm's technology has been temporarily bested by Juniper Networks Inc. (Nasdaq: JNPR) in the core router market (see Juniper Wins!).

"We have tons of new innovation coming in the next two quarters that will allow us to leapfrog Juniper again," Richardson said, while sitting on the steps of the stage in the Hilton auditorium. "We are going to come back and we are going to innovate and the tide will turn."

In the service provider business, Cisco's swagger doesn't look the same after its missteps in bringing a wavelength router to market. "They killed my baby," says Michael Zadikian, the Monterey Networks founder who is now chairman of Iris Labs. Zadikian also opined that Cisco's core DWDM product, which it acquired from Pirelli SpA, "is no longer competitive in its space."

Where did Cisco go wrong? One key area was Cisco’s willingness to fund unproven businesses in order to jumpstart its presence in the service provider market. Even though it was relatively conservative in this regard, the collapse of the CLEC (competitive local exchange carrier) market has had a big impact on Cisco's business.

“In the heyday, [Cisco] had this incredible willingness to finance their customers' businesses,” says Marshall Eisenberg, director of product marketing at Foundry Networks Inc. (Nasdaq: FDRY). “All along, we’ve only wanted to do business with people who have money to spend.”

"We got a little carried away as an industry, and we were financing deals that couldn't get financed through banks,” says Cisco’s Richardson. “And you have to wonder why they couldn't they get financed through banks. [Those financing arrangements] were very risky, and in the future we're going to be more risk averse."

Somewhat similarly, Cisco miscalculated how fast the industry and its customers would grow, which led to its recent inventory troubles. After several consecutive quarters of increased growth, Cisco had built up capacity in its supply chain to handle 70 percent year-over-year growth, says Richardson. Given that, and the components shortage of last summer, it's understandable that Cisco couldn’t slow down fast enough.

"We took a bet that our industry was going to grow at 70 percent because we didn't want our customers to have long lead times,” Richardson says. “And, unfortunately, it was the wrong bet."

Richardson also mentioned that while Cisco is back to around last year’s revenues, its expense base is “still 8,000 people higher than it was then.”

But is the company being taken any less seriously? Foundry’s Eisenberg says no. “Our biggest competitor is always Cisco because they have so many product lines,” he says.

Most importantly, though, Cisco appears to have insulated its customers from most of the fits and starts it has had of late. One so-called “Cisco Powered” metro carrier, Cambrian Communications LLC, says Cisco hasn’t changed its main company contact and has continued to be an exceptional business partner.

Joe Cecin, Cambrian’s chief operating officer, says that even Cisco’s management changes have been in his firm’s favor as there’s been “a cross-pollination of former Cerent Corp. folks into other positions.”

Of course, Cisco’s Cerent acquisition continues to be the firm’s saving grace as it sells to service providers and attacks the metropolitan optical market. It’s also a reminder that Cisco’s growth-through-acquisition strategy has paid off in many ways.

In his remarks to reporters, Cisco’s Richardson brought up a key point regarding how Cisco will grow in a crawling economy. He said the firm’s sluggish quarter and beaten down stock price don’t prevent it from making a buy if the circumstances are right. Since market capitalization is relative and since Cisco is still a much bigger, more valuable company than its competitors, the firm’s low share price isn’t much of a deterrent to acquiring other firms, Richardson says.

"The real issue right now is that unless something is accretive immediately, then we won't bring it in," he says.

— Phil Harvey, Senior Editor, Light Reading
http://www.lightreading.com