Cisco says it is effectively fending off HP and Juniper as it grapples with a significant product transition in Ethernet switching. The transition, in which customers are opting for new lower margin, higher performing Catalyst and Nexus switches over older ones, are impacting Cisco's profits and revenue share, but not necessarily its port share, says Rob Soderbery, senior vice president and general manager of Cisco's Unified Access business unit.
Soderbery was interviewed this week by Oppenheimer & Co. analyst Ittai Kidron on Cisco's fixed switching business, which includes the Catalyst 2000, 3000 and, to some degree, the modular 4000 series systems for network access applications. HP competes with Cisco in the "good enough" switching category - low-priced, high-volume, feature-limited devices - while Juniper is Cisco's chief rival in "premium" switching. HP has made some inroads against Cisco's 70%+ market share internationally, but neither HP nor Juniper has made much progress against Cisco in the US, Soderbery claims.
But in Q1, Cisco's revenue share in Ethernet switching dropped to its lowest point in two years - 65% of the $4.74 billion worldwide market, according to Dell'Oro Group. HP's share rose to 11.2% from 9.9% in Q4, and 10% in Q2 of 2010, after it closed its 3Com acquisition. Juniper's share slipped to 1.9% from 2.2% in Q4, the highest share it's held in Ethernet switching since entering the market in 2008.
Clearly, Cisco (and Juniper) has some ground to make up. Dell'Oro says in Q1, Cisco's been pushing the "good enough" Catalyst 2000 series to customers who would have normally opted for the 3000s or 4000s, in an effort to stave off competition from HP. Soderbery says it's now time for Cisco to upsell those 2000 series customers to the premium featured and priced 3000 and 4000 series systems by playing up the ability of those platforms to support video, mobility and cloud computing.
"Customers gravitated more to the 2K during the transition," Soderbery told the Oppenheimer analyst. "It's a mix issue" between the 3K and the 2K, he said. "The Catalyst 2K strategy is working (but there's) a high priority to upsell them to the 3K."
Despite the revenue share decline in Q1, Soderbery says Cisco "defended its installed base well" and regained port share in all of 2010. And though HP did not make the inroads in the US it made against Cisco overseas, customers are still "looking for more than 'good enough,'" he says, referring the HP switching portfolio.
The 3K, meanwhile, has allowed Cisco to defend port share and drive premiums, Soderbery added. But regaining lost margin involves more than just selling more premium featured and priced boxes like the Catalyst 3K; Cisco is also looking to drive cost out of production, he said.
The cost of engineering the products can be shaved, Soderbery said, by, for example, reducing the size and structure of ASICs within the systems. That's not to say Cisco is looking to rely more on merchant silicon than internally-developed custom ASICs.
"There's tremendous scale in our portfolio," he says. "We have competitive ASIC development. We always evaluate a make/buy decision. ASIC development is a core part of our strategy."
As for regaining lost share, Soderbery says Cisco is striving for more balance across revenue, ports, and profits.
"We're confident in our product portfolio," he said to Kidron. "We have a balanced strategy across ports, revenue and gross margin growth and share."
And as for the product transition itself, Soderbery says Cisco's a little more than halfway through it.
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