Chambers: Cisco's Q1 solid, but access routers, Nexus 7000 lagging

Chambers says Cisco's access routers and core data center switches are not where company wants them to be.

Despite a solid quarter as evidence its turnaround plan is working, Cisco still has more work to do to get where it wants to be.

In a call to Network World, CEO John Chambers cited access routers as one area with room for improvement.

"High-end routing we're winning big time, edge routing with both fixed and mobile; access routing is an area where we have to put more functionality," he said. "It's competing against other architectures. It's a very big market for us, but the market is shrinking. We've got to put in more functionality to get it growing again. We're competing on both an architectural change on access, as well as some endpoint competitors."

Access routing for enterprises, embodied in Cisco's ISR line of branch office routers, was disappointing in the quarter, Chambers said. Mid- to low-end routing grew 4% in orders but was down 16% in revenue, offsetting strength in high-end routing, which saw 11% growth in orders and 4% in revenues. In all, total routing grew 7% in terms of orders but declined 3% in revenue in the quarter.

"Our challenge is enterprise routing at the low end, where low-end routing is actually folding into many other different ways of accomplishing the same goal," Chambers said during the company's first quarter conference call with analysts. "I think this is one of the challenges we have. We're talking about how we put more functionality in. That's... more of an architecture decision, that I think we need to focus on a little bit more."

Chambers did not go into detail on what specific functionality might be added to the ISR and other access routers to stimulate demand. It's hard to imagine what else could be added to the ISR line - it now includes VoIP gateway, WAN optimization, video, collaboration, virtualized server and a bare metal application server module that can run a variety of applications as services on the router.

Cisco would also like to improve margins on the Nexus 7000 data center core switch. Nexus 7000 gross margins increased two points from the fourth quarter of Cisco's 2011 fiscal year to the first quarter of its 2012 fiscal year, while those on the Nexus 2000, 3000, 4000 and 5000 increased by almost five points.

Taken together, switching margins are currently at the level they were at in the first quarter of FY 2011, Chambers said, which means that switching gross margins are above the company's overall product margins. But the Nexus 7000 needs to pick up the pace.

"The Nexus 7000 has a ways to go to get back to where I want it to be," Chambers told Network World. "We used to be good at what I call the Texas two-step: product introduction, then value engineering. Nobody did it better than our Catalyst 6000 team. We've got to have more consistency."

Cisco's fiscal first quarter, the results of which were announced this week, blew past Wall Street expectations in both revenue and earnings. Chambers said the upbeat results were proof positive that Cisco's restructuring, implemented two quarters ago after consecutive quarters of lackluster results and costing more than 12,000 Cisco jobs, is taking hold.

"Our strategy is working," Chambers said during the company's first quarter conference call. "We're capitalizing on major strategy shifts in IT. We've organized our business around how (customers) want to buy key technology. We're aggressive, focused and simplified."

PERSPECTIVE: Cisco restructures, streamlines operations 

A highlight in the quarter was Cisco's deal with Korean telecom carrier KT to fund a KT subsidiary offering managed services for smart buildings and smart city projects in 14 countries in the Asia-Pacific region, including Japan, China and Southeast Asia. The subsidiary will look to upgrade traffic control systems, transportation, electricity, water and other utility infrastructures; develop building intelligence and automation systems; and offer energy management, digital signage, public safety systems, and car park management for multitenant residences.

"These are examples of how KT is aligning with us for the data center, through collaboration, through video, smart joint communities across 14 countries," Chambers said. "We are their primary partner for IT and it is IT becoming (business transformation).

"The restructuring has allowed us to organize the way customers buy," Chambers said, summing up progress in the quarter.

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