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Cisco facing product transition issues

Q1 results and Q2 shortfall not all due to overall economy

Downgrades of Cisco stock have begun following the company's shocking outlook on its fiscal second quarter. Cisco expects Q2 revenue to decline 8% to 10% from last year due to a shortfall in orders and backlog, especially from emerging market countries.

That dropped Cisco stock by as much as 13% on Thursday, Nov. 14.

Order growth rate in emerging countries, which is over 20% of Cisco's product business, has gone from a positive 13% in total in Q3, FY'13 to a negative 12% in Q1 of fiscal 2014, Cisco CEO John Chambers said in the company's Q1 conference call this week. Seventy percent of product revenue is dependent on new orders each quarter, Cisco CFO Frank Calderoni told analysts during the conference call.

[RIVALRY WEEK: Juniper taps new CEO with CIO roots]

For Q1, Cisco posted revenue short of Wall Street expectations on earnings that beat estimates by $.02 per share.

Cisco blamed the order shortfall on macroeconomic issues, such as overall global economic uncertainty. But reports that the U.S. National Security Agency is spying on allies and non-allies globally caused some pause in business, especially in China.

"It's not having a material impact. But it's certainly causing people to stop and then rethink decisions, and that is, I think, reflected in our results," said Rob Lloyd, Cisco president of development and sales, in the Q1 conference call.

That, the grim outlook for Q2 and some factors specific to Cisco prompted three firms to downgrade the stock, according to the Seeking Alpha.com site. Investment firm Wedbush believes Cisco also faces issues with product transitions, from earlier generation CRS routers to the new CRS-X and NCS platforms in the service provider market, and potentially with the new Nexus 9000 in data center and cloud.

"We believe the challenges Cisco faces with [carrier] product transitions raise concerns about the company's ability to manage one of the more evolutionary changes in networking with the new [Insieme] SDN switching platform."

Goldman Sachs thinks only 1/3 of the company's revenue guidance shortfall was due to macro issues, according to Seeking Alpha. The rest are due to product transitions, low-end edge routing share losses to Alcatel-Lucent and Juniper, and significant declines in Cisco's set-top box business as it transitions to a higher margin cloud-based video offering.

Set-top box revenue declined 20% in Q1 from last year, helping drive service provider revenue down 14%. Service provider orders declined 13%.  

Total product orders in Q1 declined 4% year-over-year.

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