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Cisco grapples with transition as routers and switches lag

At Cisco, switching, routing, revenue and profit targets are taking a back seat to new products, markets and pressures

By , Network World
February 17, 2011 12:09 PM ET

Network World - Cisco is in the throes of a companywide transition away from the switches and routers that form the bedrock of its business toward new markets to fuel future growth -- and the shift is affecting Cisco's revenue.

The transition is broader and more profound than just a product line overhaul, and the company is struggling with new competitors, customers, pricing strategies and profit pressures.

In fact, reinventing itself means Cisco has been forced to scale back its growth ambitions, cutting its 12% to 17% annual growth targets to more modest 9% to 11% in fiscal 2011.

"The 12% to 17% growth target is causing them to be much more aggressive in targeting new markets to sell into that they are taking their eye off the ball," says Zeus Kerravala of the Yankee Group, referring to Cisco's plan to address 30 or more market adjacencies. "Why wouldn't they stick to the stuff they do well and move into 10 markets instead of 30? You can't continually grow at 17% when you're a $40 billion company."

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For the first time in company history, revenue in Cisco's core routing and switching markets has been overtaken by sales of new products and associated services in data center, virtualization, video, collaboration and mobility. 

"As customers continue to transition from traditional router and switch products to Cisco's next-generation products and services, the company will need to take a hard look at restructuring itself in order to meet the revenue growth and margin expectations it has set with the market," Scott Dennehy of Technology Business Research stated in a research note to TBR clients.

Others agree.

"Cisco's going through a period of transition on multiple levels," says Jim Metzler, vice president of Ashton, Metzler & Associates. "The short-term transition is the product shifts from Catalyst to Nexus, etc. The longer term is really a fundamental shift in the marketplace."

In Cisco's second fiscal quarter, switching revenue was down 7% from last year and 11% from the first quarter. Routing revenue was up 4% from last year but down 7% from Q1. In switching, Catalyst 2000 and 3000 customers are migrating to newer platforms, while Catalyst 6000 customers are making their way to the Nexus 7000 line. Catalyst switching is a $10 billion-plus business for Cisco and any disruption will be felt widely throughout the company and the industry.

But Metzler says this upheaval might be a positive sign that Cisco is preparing the company for the future by getting into new markets and developing new products rather than relying on its legacy switching and routing portfolios.

"It's about time," he says. "Switching and routing's been funding all of these for years. When was it going to take off and bring some revenues in?"

Instead of taking its eye off the ball, Cisco movement into new markets is making the company more vulnerable to market share and profit margin erosion, and competition, Metzler says. Cisco's entry into the data center server market in 2009 cut off two channels for its product: IBM and HP. IBM is reselling Juniper gear and also acquired blade switch maker Blade Network Technologies; HP bought 3Com and EDS, which also used to resell Cisco gear but now pushes HP's networking equipment.

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