Investment firm Oppenheimer & Co. has been checking with the channel again and expects share losses and profit uncertainty to show up in Cisco's Q3. Rival Brocade is expected to grow Ethernet and SAN revenue beyond its current second quarter.
Both Cisco and Brocade will announce quarterly results in May.
Based on feedback from 36 channel partners in the US and Europe, Oppenheimer expects in-line results from Cisco but "competitive pressures" in all segments of its business: switching, routing, security, WLAN, application networking, etc. There's also lack of clarity going into Q4 on where profit margins are headed and the results and impact of recent restructurings, like that in the consumer business.
While Cisco has taken steps to realign and refocus on its core, these could take time to materialize. We feel there's more to do and it's unclear whether these actions can improve margins on a sustainable basis or just slow a downward trend. Given the lack of margin clarity, we don't have a specific view on Cisco ahead of the quarter.
Nonetheless, Oppenheimer expects Q4 sales to grow from Q3 as the channel reports a solid pipeline, budget easing and aggressive discounting. HP was cited as Cisco's most aggressive competitor but that's usually the case.
In Q3, meanwhile, financial and healthcare verticals were strong for Cisco and its partners, while public sector and government were mixed. The Unified Computing System has a $1 billion pipeline and saw moderate growth from Q2, but application networking and WLAN were soft, according to Oppenheimer.
The channel for Brocade also reports an in-line fiscal Q2 for the company but the quarter beyond look pretty bright. From its 29 contacts in the US and Europe, Oppenhemier reports that Brocade's channel is "upbeat" on both their SAN and Ethernet pipelines and are expecting "solid" sequential growth in each area.
Ethernet is expected to be flat for Brocade in Q2 due to delayed budgets and rising competition, Oppenheimer reports. SAN led the day again. But driving Q3 will be a ramp in Brocade's new 16Gbps FibreChannel SAN and VDX data center LAN offerings:
We're still seeing only limited VDX uptake from the channel given the longer data center sales cycle (remain positive on price/performance), but expect gradual progress with greater FY2H11 traction... We believe 16Gbps FC has entered qualification testing with OEMs and could spark an upgrade cycle late in FY11.
These trends, as well as rejuvenated spending in the Federal market, will stretch into Brocade's fiscal Q4 as well, Oppenheimer predicts.
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