Cisco switching transition "poorly managed and timed"

Investment firm assails execution of product turnover in Q2, expects share losses in 2011

The product transition currently impacting Cisco's switching business was "poorly managed and timed" by the company, according to a bulletin issued this week by investment firm Oppenheimer & Co. As you recall, Cisco's switching business is down 7% in its fiscal second quarter, impacting profit margins and perhaps market share. 

Oppenheimer believes the high-margin Catalyst 6500 is being impacted by both the Nexus 7000 in the data center and the Catalyst 4500 in the wiring closet. Both of these platforms carry lower margins, the firm asserts. 

In the fixed Catalyst switching realm, Oppenheimer sees the 2960-S eating into sales of the recently refreshed Catalyst 3000 line, specifically the 3560-X and 3750-X. With an upgrade to Gigabit Ethernet, the 2960-S is cannibalizing the 3K series, the firm states. 

At the same time, the competitive landscape gets tougher. Juniper is unveiling its Project Stratus switches next week and its EX 8200 is gaining some traction, Oppenheimer notes. Arista is also a formidable competitor in the data center, according to the firm. 

HP is making strides in the low-end and mid-range spaces, and Brocade just wrapped up a better-than-expected quarter that saw improved demand for its Ethernet switches. Enterprise Ethernet sales grew 4% sequentially for Brocade, EMEA and APAC were especially strong, and sales into the federal market were better than expected. 

As a result, Oppenheimer expects Cisco to lose share and continue to see margin pressure in 2011: 

Near-term trends are likely going to be complicated to predict, although long-term trends are incrementally negative for Cisco's switching business... Net, we're in for a bumpy ride with no clear direction yet. Cisco has hard decisions to make balancing share/margins.

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