Cisco SAN Sales: Ramping Hard?

Wall Street analysts say Cisco Systems Inc. (Nasdaq: CSCO) looks to be on track to turn in strong sales figures for its SAN switches in its current quarter -- potentially more than doubling its quarter-over-quarter sales in the segment.

Robert Montague, analyst at RBC Capital Markets, says the Fibre Channel switch market has become extremely competitive now that Cisco's products are shipping through various channels. He says his industry sources point to Cisco posting sales of SAN switches in the mid-$20 million range for its fiscal fourth quarter of 2003, which ends in late July.

"I think it will turn some heads," he says. "Our sources indicate it's mostly high-end business where they're winning against McData directors or the Brocade [SilkWorm] 12000."

For the previous quarter, which ended April 26, Cisco said it brought in almost $10 million in orders from around 40 customers. At the time, CEO John Chambers said that the company is shooting to double sales of its Fibre Channel switches over the next few quarters (see Cisco Reports $10M SAN Sales).

Laura Conigliaro, managing director at Goldman Sachs & Co., says she's also seen evidence that Cisco's SAN switch sales have been gaining momentum, but she adds she doesn't have "specifics sufficient enough to nail it down."More broadly, the entire storage sector may be enjoying a relatively healthier quarter. In a note today, Goldman Sachs says it expects the storage companies it covers, which include EMC Corp. (NYSE: EMC), Emulex Corp. (NYSE: ELX), and QLogic Corp. (Nasdaq: QLGC), to meet or beat revenue estimates for the second calendar quarter. "U.S. business remains the strong spot, with some evidence of an improved underlying tone," the research firm writes.

Another factor potentially helping Cisco at this stage is that it has lowered pricing on the MDS 9000-series switches -- developed by its in-house SAN division, Andiamo Systems Inc. -- to be more in line with Brocade Communications Systems Inc. (Nasdaq: BRCD) and McData Corp. (Nasdaq: MCDTA) (see IBM Slashes Cisco MDS Pricing, HP Moves Hard on Cisco, and Cisco Buys Andiamo).

But Harry Blount, senior storage research analyst at Lehman Brothers, says Cisco has landed a number of deals using a bundling strategy in conjunction with its non-storage-related products rather than undercutting competitors on price.

"They're not using price as a weapon," he says. "I haven't heard of any instances where they won head-to-head based on price." For example, according to Blount, Cisco discounted a sizeable order that a customer had placed for voice-over-IP equipment with the stipulation that the customer also purchase the Andiamo storage gear.

Moreover, the numbers that Cisco discloses for its lines of business are not sales per se -- rather, it discloses orders for a given period, says Michael Jung, an analyst with SG Cowen Securities. "They're trying to build a pipeline of business, and in reality the revenues could be much lower than that," he says.Blount adds that Cisco is able to make adjustments in how it accounts for SAN switch sales in an effort to show traction in a segment that it has been promising investors will be a hot new growth area. "They can come up with different numbers depending on where they take the discount," he says. "The thing we'd really like to know is how many ports they sold and how."

In any case, Brocade and McData appear to have been responding to Cisco's aggressive tactics in kind.

One Wall Street analyst, who insisted on anonymity, said Brocade has been offering two-for-one deals on the 12000 in certain accounts where Cisco has been in play. Also worth noting is Brocade's announcement today that IBM Corp. (NYSE: IBM) is finally offering its enhanced fabric operating system, which provides director-class high-availability features including nondisruptive code-load -- key features that will allow Brocade to more effectively compete at the high end against McData and Cisco (see IBM Offers Brocade's Enhanced OS).

Meanwhile, another source tells Byte and Switch, in mid-June McData senior management sent out a "cautious internal memo" to its sales force indicating the quarter hasn't been as strong as expected and urging them to step up efforts to win deals.

In a note today, Thomas Weisel Partners analyst Jason Ader says that Brocade's recent "discounting actions" may limit McData's potential upside for the current quarter, but he characterized the situation as a "short-term nuisance" for McData and reiterated his Outperform rating on the company. Just two weeks ago, Ader upgraded McData based on the strength of its midrange Sphereon 4500 in capturing business away from Brocade (see McData Picks Brocade's Pocket).In another wrinkle, RBC's Montague says Cisco will round out its product line with a lower-cost, fixed-port switch for the midrange of the market later in the year. To ship in the fall, the switch would be in the 20- to 40-port range and "clearly designed for cost," he says. Cisco's current MDS 9126 switch provides 16 to 48 ports via expansion line cards, a modular architecture that adds more cost to the system.

A Cisco spokesman declined to comment on its financial performance for the current quarter or on coming products. The company expects to announce earnings for its fiscal fourth quarter 2003 on August 5.

Todd Spangler, US Editor, Byte and Switch