Cisco expected to lose switching share in 2011

Oppenheimer says pricing pressure, Q2 guidance and 100M to Gigabit transition will limit revenue

Oppenheimer & Co. still thinks Cisco's going to lose revenue share in Ethernet switching even though the company's share improved in Q3 on a sequential and annual basis. Oppenheimer notes that Cisco is transitioning its 100Mbps base to Gigabit Ethernet based on the Catalyst 2960-S, negatively impacting average selling prices (ASPs) and limiting revenue growth: 

While 3Q10 was solid for Cisco, the 1GbE transition is challenging and we anticipate market share losses particularly in 1H11.

Oppenheimer also notes the downcast guidance Cisco delivered for its current fiscal Q2 as a factor in limiting or denying growth. Cisco expects revenue to be up only 3% to 5% in fiscal Q2 while Wall Street expected 13% growth from last year. 

No. 2 HP gained share in Q3 thanks to Gigabit Ethernet progress in China - through the acquired H3C/3Com - and 10G growth fueled by HP's own data center transition, Oppenheimer notes. HP replaced all of the non-HP gear in all six of its data centers following the close of its 3Com acquisition.

Oppenheimer notes, though, that 10G traction outside of HP is "lacking" for HP:

We still have questions regarding HP's data center portfolio and look for more roadmap clarity.

Another vendor challenged in the data center is Juniper, according to Oppenheimer. Even though Juniper edged out Brocade for the No. 3 spot with 1.9% share in Q3, sales of the high-end EX8200 models "disappointed" Oppenheimer:

Despite aggressive 10GbE modular pricing, Juniper's 10GbE modular market share has been flattish the past three quarters suggesting still-limited data center traction. This is an area to watch.

Juniper's strength in the quarter was driven by the EX4500 and a positive mix shift, which saw less impact from the low-end EX2200.

Brocade's Q3 Ethernet switching performance was "uninspiring," according to Oppenheimer. The company's share slipped to 1.8% from 1.9% in Q2, and sequential sales growth in 10G and 100Mbps was unable to offset a decline in Gigabit Ethernet sales. ASPs declined 3.2% sequentially, "reflecting management's focus on penetrating the market through pricing." Oppenheimer looks for Brocade's switching business to improve as its new VDX line ramps next year.

Industrywide, ASPs slipped 1.2% in Q3 from Q2, with ongoing Gigabit Ethernet and 100Mbps declines partially offset by 10G stability, Oppenheimer notes. Like Q2, 10G grew fastest quarter-over-quarter, followed by Gigabit Ethernet. 100Mbps continued to deteriorate.

For Q4, Oppenheimer expects a 5.8% decline from Q3 due to Cisco's Q2 guidance and strength thus far in the market. For the year, the firm expects the market to reach $19.4 billion, a 28% hike from 2009. But Oppenheimer expects a flat 2011 ($19.6B) due to heightened competition and pricing pressure.

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