The bad financial news at Cisco Systems Inc. means good news for buyers of network equipment, say two analysts who watch the industry closely.
“It’s completely a buyer’s market,” says Zeus Kerravala, senior vice-president of research at the Yankee Group.
“I would not buy anybody without having at least two or three competitors bidding.”
Since Cisco CEO John Chambers (pictured) announced earlier this month that it has to restructure, followed by the release of what for it were dismal quarterly results last week, there are questions about how badly the company been hurt, how soon it can recover and whether now is the time competitors can hack large chunks of market share away.
The answer seems to be that in the short run it’s been stung, it will take longer than two quarters and some financial juggling to make the company healthier and competitors won’t be able to push it from its perch as the world’s number one network equipment maker.
But for now, to prevent any significant loss of sales, Cisco will be dealing like never before.
Expect some of the biggest deals in the enterprise switching market, where sales were down nine per cent in the last quarter from the same period a year ago. Buyers of Cisco service provider routers might find attractive pricing as well. According to Dell’Oro Group, Cisco sales in that category have been dropping for about five years.
“Clearly they’re going to have to make some pricing concessions if their objective is the maintain market share,” said Paul Mansky, senior equity analyst for data centre infrastructure companies at Canaccord Genuity Inc.
Thanks to aggressive pricing from Hewlett-Packard Co. in closet switches, Cisco’s switching line is “pretty much an albatross right now, “ he said.
Cisco’s announced move to use more silicon in their products from Broadcom Corp. will be key to lowering prices, he added.
Kerravala agreed Cisco will have to make price concessions it’s either that or lose market share. Ownership of corporate networks is everything to the company, he argues, because it affects Cisco’s ability to sell adjacent products such as voice-over-IP, wireless LAN switches and Telepresence systems.
Cisco said Cisco Canada president Nitin Kawale wasn’t available Monday for comment on this article, but will be available later this week.
It’s not like the company is bleeding red ink. Third quarter net sales were US$10.9 billion, up five per cent over the same period a year ago. Net income in the quarter was US$1.8 billion – but that was down from US$2.2 billion for the year ago period.
It’s not all bad news. Dell’Oro reported in December that Cisco had 46 per cent of sales of high end Fibre Channel switch sales for storage area networks for the first three quarters of 2010, for example, and it still leads sales in a number of product categories.
But analysts say Cisco’s problems will not be solved merely by cutting off a few layers of bureaucracy.
Kerravala said that in a conference call with financial analysts, Cisco CEO John Chambers suggested that the company’s finances will get back to normal once a new cycle of products hits the market. But “the environment they’re in [now] is the new normal,” Kerravala protested. “The pricing pressure is here to stay.”
Five years ago Cisco’s competitors included financially-troubled Nortel Networks and 3Com, he argued, which chief information officers wouldn’t touch. Now HP, Juniper Networks Inc., Brocade Communications Systems and Avaya Inc. are aggressively moving into Cisco territory.
The shift to data centre network fabric architectures and the eruption of new switches from those manufacturers is helping, Kerravala added, with each manufacturer able to distinguish its products more easily than in the past.
“If Cisco believes [switch] margins are going to go back to where they were, they’re wrong,” he says. “The competitive landscape won’t let it.”
Now is the time, he said for other manufacturers to “step on the gas.”
Still Kerravala believes that when the dust has settled, Cisco will still be on top.
