Is Cisco's Switching Business in Trouble?
At the foundation of Cisco's (NASDAQ:CSCO) business is its network switching products. During Cisco's second quarter fiscal 2011, the switching business experienced a revenue decline, though company executives are still optimistic about growth moving forward.
Cisco reported its second quarter fiscal earnings this week with revenue coming in at $10.4 billion, a 6 percent increase over the second quarter of fiscal 2010. Cisco exceeded its own revenue guidance of 3 percent to 5 percent, which it issued during the first quarter of 2011. Net income for the second quarter of 2011 was reported at $1.5 billion, a decline of nearly 18 percent from the second quarter of 2010. Moving forward, Cisco provided revenue guidance for the third quarter of 2011 for a year-over-year revenue increase of 4 percent to 6 percent.
During the company's analyst call, Cisco CEO John Chambers reported that switching revenues for the quarter declined by 7 percent year-over-year. Chambers attributed the decline to an overall mix shift toward the lower-end products in the Cisco portfolio. He stressed that overall, Cisco is still growing its switching footprint as part of a networking architecture transition.
"What this means to me is that our new switching products are very strongly positioned with an architectural play, while addressing our competition from a price-performance perspective," Chambers said. "This allows us to both grow our market and to continue to improve our margins over time with these new products, as you would expect us to do."
Cisco has added a number of new switching products over the last few years as part of its new Nexus switching family. Chambers noted that while the transition to Nexus is occurring, there is pricing pressure on Cisco's more established Catalyst switching portfolio.
"This is where our competitors are focused and in simple terms, this is where we are going to own our own evolution, and we're going to own the next generation in this space," Chambers said. "To be candid, these product transitions within our own product families are occurring even faster than we expected, especially in terms of the ramp of the new products in terms of growth rates."
Cisco's switching business has also faced new competitive pressures in recent years. HP has been accelerating its switching business thanks to the acquisition of 3Com in 2010. Rival Juniper Networks has also been growing its own switching business as well.
"I'm extremely comfortable with our product leadership and architectural competitiveness of the new switching product versus our peers," Chambers said. "And we are moving very aggressively to protect any erosion of our future market share from a port or revenue perspective."
While Chambers noted that Cisco will protect its switching business, he stressed that Cisco will not be fighting back on the pricing front. "This is not a price game. This is a price-performance game with our new products coming out at dramatically better price performance than our prior ones," he said.
"And as you'd expect, our customers will move to a product with twice the performance at half the price. That's just a logical evolution of where the market is going in terms of direction."