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Cisco's Q4 indicates healthy enterprise IT spending

But public sector lags, as expected; in switching, fixed is the preference while modular down 14%

So it appears enterprise IT spending is pretty healthy despite the challenges of some of Cisco's peers. Cisco itself doesn't appear to see any downturn, given the impressive results in its fiscal fourth quarter.

Cisco beat Wall Street expectations and its own guidance for the fourth quarter, noting that orders grew 15% in enterprise, 16% in the commercial market, and 19% in service provider. Like its peers though, Cisco saw a falloff in public sector orders: down 4% overall, but down 18% in the US federal government theater.

Spending in enterprise IT overall appears to be robust, even though Cisco rivals Juniper and Brocade ran into some "air pockets" with firewall and SAN sales, respectively. Brocade also indicated that lower IT spending, as well as the malaise in the public sector market, is dampening, although slightly, third quarter expectations for Ethernet/IP switch sales.

And that's where the three diverge. Even though switch sales will come in a bit below expectations, that business for Brocade is expected to grow 13% from last year. Juniper recorded 17% product growth in switching on its second quarter.

In terms of revenue, Cisco's switching business was down 4% in its fiscal fourth quarter while orders grew 6%. Public sector orders for switching dropped 7% but if those were subtracted, orders for switching would have grown 13% from last year's Q4, according to Cisco CEO John Chambers. Twenty-five percent of Cisco's switching business comes from the public sector, Chambers said.

And like Juniper, Cisco saw security revenue drop 21%.

Spending appears to be concentrated in select areas - more so in switching than in SANs or security. The 4% drop in Cisco switching revenue may be due to four factors: customers delaying purchases to evaluate an upgrade from older Catalyst switches to new Catalyst and Nexus switches; customers purchasing the newer switches, which may not cost as much as the older ones; Cisco aggressively discounting switch purchases to win business and maintain market share; or customers opting for competitor's equipment.

Cisco's seeing more interest in lower priced/lower margin fixed switches too. Orders for fixed configuration switches increased by 13% from last year, while revenue rose 5%. Modular switching orders dropped 2%, while revenue dropped 14%.

In any event, analysts expect Cisco's switching profit margins to continue to be pressured as the company competes more aggressively to stave off market share incursions from the likes of HP, Juniper, Brocade and Arista. Margin pressure in switching the last couple of quarters helped catalyze (pun intended) the restructuring Cisco's now undergoing.

Gross margins for the entire switching portfolio decreased 1.4% in Cisco's 2011 fiscal, compared to FY 2010. But the company is maintaining sequential market share in ports and in revenue, Chambers says. Cisco shipped 36 million switch ports in the fourth quarter, the highest quarterly shipment in its history, and the company is confident it will hold switching port share leadership at 50% and revenue share in the high 60s, Chambers said. 

And the public sector? Chambers said Cisco expects global public sector spending to continue to be challenging for the next several quarters.

Separately, Cisco did disclose during the Q4 conference call that it is exiting the premises-based building energy management market in entered with the 2009 acquisition of Richards-Zeta. The company is "exploring options" for its Network Building Mediator and Mediator Manager product lines, COO Gary Moore said in the conference call:

We communicated this week the decision to adjust our investments in our energy business to match the needs of the market by focusing on energy management through standards-based solutions and will no longer be investing in premise energy management devices... In these situations, we remain committed to the long-term potential but need our investment to better match the market demand in the near and medium term.

Moore said Cisco's already decided to either exit or significantly reduce investment in several product areas that do not support company priorities. Where materially significant, like Flip and consumer, and building energy management, Cisco's already made those decisions public.

As for other product areas rumored to be on the chopping block - like cable and IP set-top boxes, WebEx and Linksys -- they appear to be staying for the time being. Said Moore:

We saw solid growth in the set-top box business, and to be clear, we remain committed to this segment of the portfolio.

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