As of this writing, Cisco shares are down between 11% and 13% even though it beat the Street’s revenue and profit estimates. Why the dip?

1. The competition is real. About 5 years ago, I visited a number of CIOs on Wall Street and asked them which vendor was their “second source” for networking equipment. I remember one saying something like, “We bought Amdahl mainframes to keep IBM honest and now we buy HDS storage to keep honest, but there isn’t a single networking vendor that we can count on as a true competitor to Cisco.” Times have changed. HP and Juniper are truly winning enterprise business–not because of any real weakness in Cisco’s portfolio, but because IT wants strong competition in networking just as it did in other areas.
2. The economic recovery is uneven at best. IT purchasing is up and, according to ESG research, 46% of enterprise and SMB organizations will invest in networking equipment. That said, some industries like state and local government, transportation, and education are still really hurting. A few years ago, Cisco could schmooze budget-constrained customers or throw in additional products and still win the business. In today’s world, a $20k savings may win the business for Extreme Networks or HP. Unless Cisco matches prices, it will be difficult to compete in these financially-strapped industries.

Cisco is especially vulnerable in various network tiers. For example, some companies are passing on Cisco at the access layer in favor of others like Extreme and HP. Cisco maintains the profitable network core, but loses out on dozens, if not hundreds, of access switches per customer.

Cisco is a great company and will likely rebound with server sales, software, new acquisitions, and cost cutting measures. Nevertheless, I agree with John Chambers: this is a transition point for Cisco.

Related posts:

1. The Cisco Squeeze
2. Cisco’s “Kitchen Sink” Product Announcements
3. Cisco Announcement: More than the CRS-3
4. Note to Cisco: Pick Your Security Battle
5. Approximately Half Of All Organizations Will Increase Security and Networking Spending in 2010

Tags: access switches, Cisco Systems, EMC, Ethernet switches, Extreme Networks, HP, IBM, John Chambers, Juniper Networks