Cisco, others see run on data center switches

But software centrism, competition prompts a stock downgrade just after Juniper's

Data center Ethernet switch revenues exceeded $2 billion in the fourth quarter of 2012, putting this market on an $8 billion annual run-rate, according to Crehan Research. Calendar 2012 revenue growth "far exceeded" that of 2011, the firm states, helped by a slowdown in the decline of chassis/modular Ethernet switch shipments and increasing adoption of 10G Ethernet switches.

The stabilization in the decline of chassis/modular data center Ethernet switches meant average selling prices fell only a bit in 2012, Crehan notes. Chassis and modular switches command a considerable price premium over the market average.

Fixed and top-of-rack data center switches continue to reach record levels, the firm notes. This form-factor is used not only for server access deployment but increasingly for aggregation as well.

FibreChannel switches also saw revenue growth in the fourth quarter as higher pricing offset port-shipment declines, Crehan notes.

Crehan's long-term outlook for the entire data center switch market -- Ethernet FibreChannel and Infiniband -- is for it to approach $16 billion by 2017.

Meanwhile, FBR Capital downgraded Cisco from Market Perform to Underperform, citing weaker demand for routers and switches as it relies more on software and services. Cisco late last year said it wanted to double software revenue and increase services revenue to tightly tie it to its hardware and boost profits.

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The downgrade follows a Sell recommendation on Juniper stock from Goldman Sachs this week citing that company's move to a software-centric business model, as well as competitive pressures from Cisco's Nexus 6000 switch and Alcatel-Lucent's 7950 XRS core router. FBR also downgraded Juniper to Underperform from Market Perform

States the FBR report on Cisco:

We believe Cisco will become increasingly more challenged to offset weaker-than-expected routing and switching demand as it works to transition to a more software- and service-centric business model. Looking ahead, we see the potential for additional negative technological trends that could significantly blur the lines between routers, switches AND servers.

FBR expects a "slow, but meaningful" reduction in the number of routers and switches deployed into networks; the adoption of an increasingly larger mix of white box, lower-margin product based on merchant silicon; and the introduction of new competitive products and vendors that could negatively affect gross margins at both companies and across the space.

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