Cisco's Q2: New products, old worries

Cisco's Q2: New products, old worries

Summary: Emerging markets, routers and switching sales growth and future strategy are among the Cisco worries in the second quarter.

TOPICS: Networking, Cisco

Cisco has launched a bevy of new products and a vision to put its architecture in the middle of hybrid data centers as well as private and public clouds. But those efforts may take time to pay off.

In the meantime, the waiting game and worries about the global economy as well as pricing pressure for networking gear has analysts fretting about Cisco's earnings.

Cisco reports its fiscal second quarter results Wednesday after the market closes.

Also: Cisco IOx brings apps to network edge in latest Internet of Things play | Cisco aims to be cloud connector in hybrid data centers | Cisco launches ACI, a software analog to UCS in data centersCisco launches Internet of things division, eyes standardization

Analysts will be listening closely for products and services that will deliver revenue growth for Cisco, which has formed a narrative around the Internet of things and networking it together. Wall Street is looking for second quarter earnings of 46 cents a share on revenue of $11.03 billion.

FBR analyst Scott Thompson sums up the problem with Cisco.

Our checks indicate that many clients still trust Cisco to deliver an end-to-end solution that is generally well received by these companies’ tech teams. This dynamic supports Cisco’s goal of being the client's top IT partner. However, our conversations also suggest that IT professionals at carriers and enterprises are increasingly considering alternative solutions to reduce total cost of ownership (including bare metal architectures and less capital-intensive options). We believe the traditional networking methods will continue to slowly give way to much leaner and more efficient Web scale–like architectures, which could be a risk to Cisco and its hardware-intensive go-to-market strategy.

Indeed, Cisco is seen as a hardware company. Its latest efforts to bridge clouds, however, revolve around software. Ultimately, Cisco wants to do the integrated system approach and capture the profit margins that go with it.

hybrid cloud cisco


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Among the moving parts:

  • Cisco's emerging markets business. Cisco has been hammered in China and some analysts say the NSA fallout has something to do it. Janney analysts Bill Choi said:
  • Cisco has been disproportionately affected by NSA fallout in emerging economies, and this may be a lingering problem, especially given the company's top-down approach to foreign markets.
  • Weak switching and routing sales. Credit Suisse expects switching revenue to fall 7 percent in the second quarter and routing sales to sink 20 percent.
  • Product and sales cycles. Ittai Kidron, Oppenheimer analyst, said Cisco's outlook could be dinged by new products and sales cycle. Kidron said:

Cisco's ongoing product cycle including Insieme, NCS and UCS could also weigh on Cisco's outlook. Sales cycles are likely to lengthen as customers evaluate next-gen technologies although these are critical updates.

Topics: Networking, Cisco

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  • Be careful about putting too much on CapEx

    The talk du jour in the analyst circles is how the threat of white box or bare metal switching will impact CapEx. This will certainly put pressure on Cisco (and all vendors) to keep prices in line. But there are two things to consider:

    1. The longer term cost bogie needs to be OpEx. It is by far the major driver of cost. The bare metal switching guys don't have an inherent cost advantage here. The competition will be on merits of the solution. Stronger ties into automation frameworks will matter.
    2. Pricing is the primary differentiator when two solutions are equivalent. The question is whether Cisco can maintain premium pricing because they offer something others do not. Today, that something is a catalog of features no one else supports. The real threat of SDN is that architectures are becoming simpler (read: that catalog is less relevant over time). So what does Cisco add to their portfolio to maintain differentiation? If ACI is any indication, they will say that it is integration with other infrastructure to provide better performing and more application-centric solutions.

    Note that I don't actually work for Cisco. My interest in this thread is largely academic.

    Mike Bushong (@mbushong)
    Mike Bushong