May 10, 2011 / 4:49 AM / 6 years ago

ANALYSIS-Cisco needs more than a quick fix

* Chambers put job on line when he started reorganization

* Company is under margin pressure, pricing pressure

* Faces stiff competition from HP, Juniper

By Jim Finkle

BOSTON, May 9 (Reuters) - It will likely take more than a quick reorganization for Cisco Systems Inc (CSCO.O) Chief Executive John Chambers to turn around the troubled technology bellwether.

Chambers, a Silicon Valley icon who has run the company for 16 years, put his job on the line last month when he told investors that Cisco had lost its way in recent years as it spent heavily to expand into dozens of new markets. [ID:nN05121731]

Since the rare admission, he has trimmed the company's bloated management structure, offered early retirement to some employees, killed the Flip camcorder and laid off 550 workers. [ID:nN05259871].

More changes are in the works. Wall Street analysts will grill him about what's next on Wednesday when Cisco holds its quarterly earnings conference call. Expectations are low as the company has disappointed for the past three quarters. Its shares have lost 20 percent of their value since the company's last quarterly report, on Feb 9. [ID:nN08294447]

Analysts want to hear how Chambers intends to revive his bread-and-butter business of selling the plumbing of the Internet and corporate networks. They will zero in on its switching business, where sales dropped 7 percent in its most-recent quarter.

"They've been under margin pressure and share pressure and it's only going to get worse," said Joe Skorupa, an analyst with Gartner.

The research firm recently issued a report advising clients who had long used Cisco switches to diversify their networks to include products from other manufacturers including Hewlett-Packard Co (HPQ.N) and Juniper Networks (JNPR.N).

MULTIPLE RIVAL PROVIDERS

Conventional wisdom has been it was cheaper to build a network with equipment from a single provider -- Cisco -- because those switches were designed to work together.

But Gartner told its clients they were better off using multiple vendors -- summing up the trend of past years in the $21 billion-a-year market for switching equipment, where Cisco commands a 67 percent market share.

Rivals such as Juniper and HP have caught up with Cisco in terms of features, sell their products for less and provide software for operating their switches that is easier to manage than Cisco's offering, Gartner told its clients.

"Folks are nipping at their heels from a technology perspective," said Gerard Gibert, CEO of Mississippi-based Venture Technologies, a firm that sells Cisco equipment.

One area where Cisco has fallen behind is in manageability. The company sells several lines of switches, which run on different operating systems.

HP and Juniper, by contrast, offer their customers one piece of software for managing all their switches. That means customers need to spend less training IT staff.

Cisco has begun to address the issue through a new product dubbed Cisco Prime, which it recently introduced.

"I do think there are some improvements they could make in some of their products," said Rolf Versluis, CEO of Adcap Network Systems, another Cisco reseller.

UP AGAINST AN AGGRESSIVE HP

HP on Monday introduced several new switches at Interop, one of the key conferences for the networking industry. Cisco announced a partnership with Xerox Corp (XRX.N), but did not unveil any new switching product.

Hewlett-Packard Executive Vice President David Donatelli said the new HP switches cost less and perform better than Cisco's comparable offerings.

HP, which last year had 9 percent of the switching market, typically charges 35 percent to 40 percent less than Cisco for similar products, Donatelli said. And HP is aggressively adding sales staff and resellers as it seeks to catch up.

"Our goal is to grow this business significantly. We are taking all the steps necessary to achieve that goal."

The competition has hurt Cisco's profitability, causing its second-quarter gross margin to narrow to 62.4 percent from 64.3 percent in the first quarter.

That is partly because Cisco has been forced to cut prices sharply to keep HP at bay.

"When HP is involved, it's war. It's just absolute war," said Brian Osborne, executive vice president with Cisco reseller Sentinel Technologies Inc. "They do not want to lose to HP."

(Editing by Edwin Chan, Bernard Orr)

((jim.finkle@thomsonreuters.com; + 1 617 856 4344; Reuters Messaging: jim.finkle.reuters.com@reuters.net)) Keywords: CISCO/

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