Cisco caught off guard by switching hit

Cisco surprised by product transition's impact on profits, but COO appointment coincidental, not a reaction.

The product transition currently redefining Cisco's business took the company by surprise, CEO John Chambers said during the company's partner conference in New Orleans this week.

NEW ORLEANS -- The product transition currently redefining Cisco's business took the company by surprise, CEO John Chambers said during the company's partner conference here this week.

But tapping Gary Moore as the company's first COO, which occurred two weeks after Cisco announced its second quarter results and the impact of turnover in its product portfolio, was coincidental and not a result of the company's recent financial misfortunes.

"I thought about (naming a COO) for 10 years," Chambers said during a press roundtable at the Cisco Partner Summit. "It was the right time."

Cisco's second quarter saw switching revenue drop 7% and gross margins decline because customers adopted new platforms, such as the Nexus 7000, and Catalyst 2960-S, 3560-X and 3750-X. These switches offer better price/performance than the Catalyst 6500 and earlier 2000 and 3000 series models, so the shift to the new switches affected revenue and profit margins.

MISSTEP: Cisco switching transition "poorly managed and timed"

Cisco is also seeing revenue from new products and services overtake that of its core routing and switching businesses, which portends a transformation of the company from one dependent predominantly on sales of its bedrock products to one now relying on new markets.

The pace of the switching transition and resultant hit on revenue and profits caught Cisco off guard, Chambers said at the Cisco Partner Summit.

"It did surprise us," he said. "I don't like surprises. We did get surprised on it. That's part of the focus on operations, to get operations up to the exact same level as innovation."

But Chambers reiterated that Moore's appointment as COO was not predicated on the operational imbalance in switching or other product issues in the second quarter. Chambers went to the Cisco board and senior leadership team with Moore's COO candidacy two days before the company announced his appointment on Feb. 22.

Switching wasn't the only hiccup in Cisco's second quarter. The company's consumer business was off 15% in the quarter, and sales of cable set-top boxes were down 29%.

Cisco markets its products as components of an overall architecture to change or improve business processes. Cisco will maintain this architectural pitch for set-top boxes, but will reconsider it in the consumer space, Chambers said.

"The consumer clearly did not buy up-market," Chambers said. "That market transition did not occur as quickly as we thought."

Cisco's overall architectural play could use some fine-tuning, as Cisco is still perceived as charging a premium for its products.

"We have more work to do both internally and with partners to accentuate the architectural differences of our high-value technologies," says Rob Lloyd, executive vice president of worldwide operations at Cisco. "From a business model perspective, the unit of cost for our partners to deliver the high-value technology is almost exactly the same as low-value technology."

As for competition, Chambers and Lloyd had plenty to say about Juniper's new data center fabric play, the QFX3500. The QFX3500 is the first iteration of Juniper's multiyear, $100 million Stratus project.

"It's an interesting area of innovation in the role of the network in delivery of cloud," Lloyd said. "But we have 10,000 customers on Nexus. Private cloud architectures are being built on Nexus. We are years ahead. We established this architectural beachhead."

"To be an integrated player - with ASICs, software, hardware, services - is hard," Chamber said. "We did the heavy lifting with 10,000 customers, and 7 million ports. (Stratus is) still remarkably piecemeal; it's not architecturally tied together. It speaks to, this is hard. We are tough on competition."

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