Cisco: Oppenheimer Impressed with ‘Stability’ in Switching

Oppenheimer & Co.’s Ittai Kidron today takes a “deep dive” into the switching equipment market, and observes that Cisco Systems (CSCO) appears to be gaining share in every corner of the ethernet�switching market, albeit in a market that saw sales drop in Q1.

Kidron, who has an Outperform rating on Cisco shares, and a $22 price target, writes that revenue and units both declined in Q1 in all parts of the business:

After growing sequentially for three quarters in a row, the ??????Ethernet switching market experienced a seasonal decline in 1Q12 of 9.6% to $4.8B. Every -25% segment declined QoQ with 10GbE once again outperforming and declining only 8.1% QoQ yet up 23.1% YoY to $1.6B. 10GbE now accounts for 33.3% of the overall market, up from 32.7% last quarter. 100Mbps revenue dropped 14.4% QoQ to $366M, and we expect 100Mbps to continue to decline going forward. 1GbE declined by 10.5% QoQ to $2.8B and still represents the majority of the switching market at 58.4%. For the first time we are introducing 40GbE results which we expect will grow for the foreseeable future.

Kidron is impressed with Cisco’s ability to drop less in the quarter and increase its market share:

Cisco�s switching revenues contracted at a slightly slower than market rate pace QoQ in 1Q12, and grew faster than market on a YoY basis in what is typically a challenging seasonal quarter for the company. In 1Q12, Cisco�s switching revenues decreased 9.1% sequentially to $3.38B and its revenue share slightly improved to 70.4% from 69.9% in 4Q11 and 69.7% in 1Q11. Overall ports shipped declined 7.0% sequentially to 31.7M, suggesting ASPs fell 2.2% while overall market ASP declined just 0.2% sequentially. The drop in ASP was largely due to a decline in fixed 1GbE and 10GbE switching ASPs [�] We believe Cisco�s market share stability is impressive considering an unfavorable geographical mix with emerging markets performing well while the US market, where Cisco�s market share is strongest, seasonally weaker. We attribute Cisco’s success to solid demand for the refreshed Catalyst 2960. Looking at pricing, fixed 1GbE port shipments declined 8.7% sequentially to 16.1M suggesting ASPs dropped 3.1% QoQ to $85. We believe the change in geographical mix is behind the ASP erosion.

In Kidron’s view, competitor�Juniper Networks�(JNPR) is struggling with a product line that’s not quite the right fit:

fter a strong 4Q11 where the company gained share in every market category, Juniper lost share in almost every category and its switching revenues dropped 15.2% sequentially to $116M pushing its market share down to 2.4% from 2.7% in 4Q11. Juniper saw most of its challenges in modular switching (1.4% share, down from 1.9% in 4Q11) where we believe the EX6200 has been slow to ramp and the EX8200 has had challenges gaining incremental traction. We believe the transition to fixed switching in wiring closet and campus environments could limit the opportunity for the EX6200 and that the EX8200 is now somewhat underpowered compared to its peers and needs a refresh.�