"It's about time," he says. "Switching and routing's been funding all of these for years. When was it going to take off and bring some revenues in?"
Instead of taking its eye off the ball, Cisco movement into new markets is making the company more vulnerable to market share and profit margin erosion, and competition, Metzler says. Cisco's entry into the data center server market in 2009 cut off two channels for its product: IBM (IBM) and HP (HPQ). IBM is reselling Juniper gear and also acquired blade switch maker Blade Network Technologies; HP bought 3Com and EDS, which also used to resell Cisco gear but now pushes HP's networking equipment.
And moves into the consumer and home entertainment markets are proving more challenging than perhaps Cisco anticipated. Sales in Cisco's Consumer line of business was down 15% in Q2, while sales of cable set-top boxes -- from the $7 billion Scientific-Atlanta acquisition in 2005 -- were down 29%.
Cisco may be overshooting this market by offering products of premium price and functionality as part of its strategy of positioning them as components of an overall architecture for home networking. The company's new umi consumer telepresence system wins praise for its quality but is panned for its price.
Indeed, in the Q2 conference call with analysts, CEO John Chambers admitted that Cisco's value-add higher-end consumer products "got crushed" at Christmastime.
"When someone goes to Best Buy (BBY) they're not thinking architecture," says Metzler.
The product and market transitions are putting a squeeze on Cisco's gross profit margins. Chambers said this is due to customers moving to switching platforms that offer better price/performance. But analysts note the margin pressure also indicates that Cisco is dropping prices in order to defend market share.
"(It's) a reflection of multiple concurrent switching product transitions as well as Cisco needing to aggressively protect its installed base," states Ittai Kidron of Oppenheimer & Co. in a bulletin to investors. "We believe the strong uptake of Cisco's new switching portfolio suggests it's playing defense well."
"The product transitions indicate the competitive pressures they're under," says Yankee Group's Kerravala. "Customers don't believe in an end-to-end architecture anymore. Cisco can't force customers to buy up and pay a premium anymore."
Oppenheimer also notes that Cisco is "quietly backing away" from its 12% to 17% long-term growth target. It all adds up to Cisco being a bit too bullish on its prospects and not anticipating the timing or disruption of a) switching customers transitioning to newer platforms and product lines; and b) the upheaval new products born of entry into market adjacencies would have on core routing and switching.
Sign up for CIO Asia eNewsletters.