Cisco Storage Spikes

One quarter after taking a step backward, Cisco Systems Inc. (Nasdaq: CSCO) made a leap forward in storage revenue at the end of 2004 that suggests it picked up market share on its major rivals (see Cisco Reports Q2).

Cisco reported 40 percent sequential growth and a 70 percent year-over-year increase in storage last quarter, a big improvement from November when it announced a 2 percent sequential drop in revenue (see Cisco Storage Slips). Even taking into account that the final quarter of the year is traditionally strong for storage sales, Ciscos 40 percent jump to $56 million in revenue is impressive.

Market leader Brocade Communications Systems Inc.’s (Nasdaq: BRCD) guidance for the quarter calls for a 2 to 5 percent increase in revenues, while No. 2 McData Corp. (Nasdaq: MCDTA) guided for an increase of 5 to 7 percent (see Brocade Tops Switch Sales and McData Merely Mediocre). Brocade reports its earnings Feb. 19, and McData reports Feb. 24.

“We’ve moved into a new market where we were not a player at all, and are currently growing at five times the industry growth rates,” Cisco CEO John Chambers told analysts on a conference call Tuesday night. “So [we’ve had] very rapid market share positioning in that category.”

Financial analyst Aaron Rakers of A.G. Edwards backs up the CEO's claim in a note today, estimating that Cisco gained 4 to 5 percent in its share in the overall SAN switch market and 5 percent in the director space.What’s fueling that growth? It's not new products: Unlike Brocade, which rolled out a series of new products in 2004, Cisco hasn’t made major changes to its core SAN switches and directors (see Brocade Launches Meteor and Brocade Dazzler Starts Low).

Perhaps customers who were reluctant to embrace a storage newcomer a year ago, trust Cisco now that it has a bit of storage history.

“Storage customers are certainly warming up to Cisco,” says financial analyst Kaushik Roy of Susquehanna Financial Group. “Customers we speak with are definitely more willing to sign up Cisco now.”

Like its major competitors, Cisco sells SAN gear mostly through OEM partners such as EMC Corp. (NYSE: EMC), Hewlett-Packard Co. (NYSE: HPQ), Hitachi Data Systems (HDS), and IBM Corp. (NYSE: IBM). Roy says he believes Cisco sales through EMC surged last quarter and its revenue from HP doubled. He says most of HP’s Cisco sales were switches, while Cisco’s SAN revenue before last quarter had come almost exclusively from directors.

Cisco could continue to see strong sales through EMC, which has traditionally enjoyed a stronger relationship with McData, which was part of EMC from 1995 to 2001. Industry insiders believed EMC and Cisco had an icy relationship, but that has thawed in recent months. The two companies forged a NAS partnership around Cisco’s new WAFS appliance last month (see Cisco & EMC Close NAS Deal and Cisco Wades Into WAFS). Also, EMC’s upcoming iSCSI SAN announcement could help Cisco, which sells Ethernet switches used for iSCSI (see EMC to Serve Up IP SANs).Cisco might also benefit from its rivals going through transition periods. Brocade recently switched CEOs after an accounting snafu, and McData is integrating recently acquired rival CNT Networks (see Brocade Switches CEOs, Restates and McData Bags CNT for $235M).

— Dave Raffo, Senior Editor, Byte and Switch