Cisco Rattles Storage Sabre

Cisco posted strong storage results in its fourth-quarter report last night, the same day its main switch rivals, Brocade and McData, morphed into a single entity. (See Cisco Reports Q4, Brocade Bags McData For $713M, and Users Mull Merger.)

The vendor's Q4 storage revenues were up more than 65 percent year over year -- a gain credited to Cisco's latest storage product release, at least by one analyst. (See Cisco Goes 4-Gig & Big and EMC Certifies Cisco Director.) "We believe this reflects the first full quarter of contributions from the company's new 4-Gbit/s 528-port MDS 9513 Director, as well as some traction in the fabric switching market," states Aaron Rakers, enterprise storage analyst at A.G. Edwards, in a note this morning.

At the same time, Cisco's putting its own spin on the Brocade/McData merger. "We're beginning to encourage an industry consolidation of many of our peers in many areas of communications and IT," said Cisco CEO John Chambers on last night's conference call with analysts.

Cisco now has only one major competitor in the switching space, prompting speculation that the vendor may snap up QLogic to corner the low-end switch and HBA market -- a move that may not be great for consumers. One Cisco customer expressed concern on the Byte and Switch message board this morning: "Although I'm a Cisco user, this is not something that excites me. Lack of competition is never a good thing."

Another reader echoed that sentiment: "While I have always thought that a Cisco/QLogic merger would be a good matchup, I would like to see even more competition out there in the FC switch arena."Cisco did not break out specific storage numbers on last night's call, though Rakers estimates the vendor's quarterly storage revenues were in the region of $100 million. Revenues for the vendor's Advanced Technology Group, which also includes security, wireless, home networking, and optical products, were up 65 percent year-over-year to $2 billion, although this included $513 million of sales from Scientific-Atlanta, which Cisco purchased earlier this year.

Interestingly, Cisco execs said that storage growth was better than 65 percent, while the company cited 65 percent overall ATG growth.

Despite the upticks, it could be some time before storage, along with the rest of the product lines in Cisco's ATG, become fully established as separate businesses. "While Cisco places a strong emphasis on each growth market, they are still in early stages and could take three to five years to fully develop and become $1 billion opportunities," warned UBS Research analyst Nikos Theodosopoulos in a note this morning.

Meanwhile, Cisco is bullish on its ATG. "Storage area networking, unified communications, formerly known as enterprise IP telephony, and wireless led the way," explained Chambers. "We believe that we are gaining market share versus almost all of our competitors.".

On last night's call, Chambers hinted that the vendor is exploiting its direct sales channels to bolster its storage business. "[If] you look at SAN, we're just executing extremely well and we're learning how to move more aggressively in the data center," he said.Brocade is already maneuvering in its own channels to combat Cisco's assault. In SEC documents filed this week, the vendor set about allaying any concerns that its own OEM partners may have following the McData acquisition. Brocade CEO Michael Klayko promised more streamlined operations and qualification processes in the future, as well as higher levels of support and service.

Cisco's Q4 results build on a solid set of figures in its prior quarter, suggesting that the vendor's switch and director businesses are indeed gaining momentum, despite some shaky results in the past. (See Cisco Storage Rebounds, Cisco Storage Stays Mysterious, Cisco Storage Slips, and Cisco Storage Spikes.)

Overall, the vendor reported fourth quarter revenues of $7.98 billion, up from $6.6 billion in the same period last year, just above analyst estimates of $7.92 billion. On a GAAP-basis, Cisco's earnings per share were 25 cents on net income of $1.5 billion, up from 20 cents and $1.3 billion in the year-ago quarter. Analysts had estimated earnings of 28 cents per share.

In trading today, Cisco's shares rose $2.59 (14.96 percent) to $19.88.

James Rogers, Senior Editor, Byte and Switch