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The Financial Picture
Cisco skeptics say the company’s expansion hasn’t solved the increasingly competitive pressure on its core businesses. In its most recent earnings announcement, for the second quarter of its fiscal 2011, Cisco’s profit declined 18 percent year over year, switching revenue was down 7 percent year-over-year (11 percent sequentially), and routing was up 4 percent (down 7 percent sequentially) -- less-than-encouraging numbers for product categories that together still make up about 46 percent of Cisco’s overall revenue.
On the second-quarter earnings call, which took place after CRN’s interview, Chambers said Cisco was going through “a period of transition” that was happening faster than Cisco anticipated, and that newer and future Cisco products would compete far better at the level of price performance. Cisco has no intention of competing with vendors on price itself, he said. And beyond the routing and switching declines, the story of Cisco’s newer products -- notably data center virtualization, up 59 percent year over year, and collaboration, up 37 percent -- was definitely a bright one. But along with softness in its consumer business and concerns for public sector, the numbers served to amplify a third straight quarter of disappointing results. Cisco’s gross margins also tightened to 60 percent, from 65 percent a year earlier.
“Cisco believes its 2011 fiscal year revenue will grow somewhere in the 9 percent to 10 percent range, which raises the question as to whether the company’s growth prospects are as bright as they were a few quarters ago,” Scott Dennehy, engagement manager/senior analyst at Technology Business Research, wrote in a recent research note. “While TBR believes Cisco’s overall strategy is solid, the company may simply be too large and dispersed to achieve growth rates comparable to smaller and more-focused competitors.”
When it comes to its key networking competitors, many are looking to exploit Cisco’s aggression as hubris. HP, for example, has been relentless in touting HP Networking wins vs. Cisco and in December launched a trade-in program through which VARs can save 20 percent on HP Networking gear if they trade in certain Cisco Nexus or Catalyst switches.
Many of Cisco’s other competitors, from Juniper Networks and Brocade on the data side to the marquee names in wireless, videoconferencing and WAN optimization, have also stayed on the attack against Cisco, painting Cisco’s end-to-end architectural vision as too expensive, too closed, too proprietary.
Some analysts have taken up that mantle as well. A much-circulated November 2010 report by Gartner took specific aim at Cisco and the idea of single-vendor dominance in networking and infrastructure.
“After interviewing various organizations that have introduced a second vendor into their Cisco infrastructures, it is clear that in most cases today there is no financial, operational or functional basis for this argument,” wrote analysts Mark Fabbi and Debra Curtis. “The reality is that a single-vendor Cisco network isn’t necessarily less complex, easier to manage or more reliable than a network with multiple vendors when implemented with best practices.”
But in the interview with CRN, Chambers insisted that Cisco’s architecture approach -- its flexibility and its variability -- will be what preserves partners for the long haul. More importantly, partners who want to survive have no choice but to adapt, especially with market transitions happening so quickly, he said.
NEXT: Will Partners Follow?