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Cisco Earnings Turning Around But Still Watch Competition

Cisco's earnings call shouldn't be shocking. The market is down and IT is no exception. Year over year, revenue is down for nearly all of Cisco's product lines, except services. However, Chambers did say that Q4 FY'09 was "the first positive sequential product order growth and the  first quarter in the entire fiscal year that was anywhere close to having normal sequentionality. For me personally, this was the most important takeaway in the quarter." Chambers said these postings were more along the lines of normal business, but tempered those remarks, indicating that it was too soon to tell of this quarter indicates a trend back to pre-recession business.

Over the first three quarters of FY'09, Cisco saw 10-15% below sequential order patterns. In Q4, the sequential order to the same quarters was more in line with pre-recession patterns, which is up approximately 10%. Chambers also noted sequential order patterns were up regionally as well. In the year over year, customer orders were all down across all segments, with the Public Sector down the least at 3% year over year and enterprise down 30%, service provider, and commercial orders down.

Chambers predicts that Cisco will continue to see increased sales particularly in the CSR and ASR router lines, tying the Nexus 5000 and 9000, along with the Nexus 2000 LAN extender.  Cisco had a record quarter for the Nexus 7000 data center switch and they see high market acceptance across all their segments. Cisco is approaching 1000 customers using the Nexus 5000 and Nexus 2000 Fabric Extender, and the company is starting to receive orders for the Nexus 1000 virtual switch.

Of course, Cisco continues to face competition in enterprise LAN switching from the likes of Brocade, Extreme, HP Procurve, Juniper, Netgear, and 3Com. These other vendors' products are often as feature-rich as Cisco's. Even vendors that cater to SMB markets are offering low cost switches that offer stacking, virtual switch management, and support protocols traditionally used by larger enterprises like link aggregation, VLAN, and layer QoS. While no one vendor has the mindshare to take on Cisco directly, moves like Extreme's new limited lifetime warranty, which is nearly on par with HP Procurve's limited lifetime warranty, reduce operation costs for support and may sway price-conscious organizations away from Cisco.

In the data center, Juniper's OEM partnership with IBM and Brocade's acquisition of Foundry signal renewed vigor in switching, where the  focus is on unifying data center networking from the transport layer through management. Specialty switches from Infiniband vendor Voltaire and start-up Arista Networks are nipping at special cases where high speed, low latency bandwidth is required. In short, Cisco is going to meet more competition in their traditional markets as well as markets they are entering. But that doesn't phase Chambers who said during the earnings call, "If we don't have good, big competitors in each of the markets we are moving into, from the home to switching, to the data centers, to Smart Grid, we're probably in the wrong market. The good news is we don't lack for good competition."

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