Cisco girds for Huawei's US entry

After a solid Q1 and a successful turnaround, more competition on the way

Analysts are upbeat on Cisco's fiscal Q1 results, which beat Wall Street estimates and served as proof positive that the company's restructuring is paying off. There were several highlights in the quarter, but there are also areas still in need of improvement.

And then there's the competition, which now includes Huawei in North American enterprises.

First, the positives: Overall product orders grew 13% from last year. Cisco Unified Computing System continues its torrid pace, realizing order growth of 116% and over 1,500 new customers. Cisco now has just less than 9,000 customers for the data center convergence platform.

Switching gross margins improved sequentially -- the Nexus 2000, 3000, 4000 and 5000 increased by almost five points and switching margins are now back to Q1 FY 2011 levels. You might recall that pressure on switching profit margins kicked off the restructuring that Cisco initiated earlier this year when it killed Flip, gutted its consumer business, eliminated over 12,000 jobs and refocused on its core businesses.

High-end routing revenue increased year-over-year, with 11% growth in orders and 4% in revenues. And Cisco saw an uptick in public sector after several quarters of softness, with 10% order growth from last year. US public sector orders grew 5%.

On the downswing though, overall routing revenue declined 3%. Switching revenue was flat. And margins on the Nexus 7000 core data center switch are still not up to Cisco's liking even though they grew 2% in Q1.

Access routing revenue was down 16%. Cisco CEO John Chambers says Cisco needs to pack more functionality into the ISR line in order to stimulate demand. Hard to gauge what more could be added when the ISR already includes VoIP, WAN optimization, video, collaboration, virtualized server and a bare metal application server.

Going to Q2, Europe and India may be soft markets given economic and governmental strife. But Cisco nonetheless guided to a revenue boost of 7% to 8% over last year. Analysts like Ittai Kidron of Oppenheimer & Co. reacted favorably to the quarter:

Given the company's solid execution and renewed focus, we're increasingly more comfortable that Cisco is on the right track, and we feel the company is managing expectations well. The company's momentum appears to be building at the right time, and it continues to be a solid defensive play in an uncertain environment.

But Cisco expects a tough battle from competitors, naturally. And one old combatant invading Cisco's shores is Huawei, which recently initiated an assault on the North American enterprise market.

Cisco's going to give them all they can handle, according to Chambers:

We're going to make it hard on them in the U.S. and we're going to be very tough. When you see the growth numbers in the enterprise and the commercial, like you saw this last quarter and the quarter before, it means we're doing extremely well here. But...they're going to be a tough competitor. We're just going to try to make it as tough as we can on them, and we plan to beat them. But they'll be around 4 or 5 years from now.

Scott Dennehy of Technology Business Research believes Cisco will continue to have its work cut out for it with Huawei:

Cisco will continue to face difficult challenges from competitors, as companies such as Dell and Huawei make aggressive moves in Cisco's core markets. TBR expects Cisco will have the most trouble with Huawei, as the China-based multinational is one of few vendors that can offer a comparable solution portfolio, and who recently set its sights on Cisco's home turf by launching its official U.S. enterprise channel program in early October. TBR expects Huawei's low-cost message will be attractive to many U.S.-based Cisco partners looking to gain an advantage in an increasingly competitive marketplace.

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