Cisco Systems' stock has plummeted nearly 20 percent since announcing its finanicial results for the quarter ending Oct. 31. While Cisco's revenue and growth were solid, its forecast left investors and analysts stunned. One vendor says that open source is encouraging competition in Cisco's arena, which could increase pressure on Cisco's performance. If so, what should Cisco do, and how should IT decision makers prepare?
Cisco's revenue slows down
Cisco projected revenue growth of 3 to 5 percent for the next quarter and 9 to 12 percent for its 2011 fiscal year (Nov. 2010 through Oct. 2011). Both ranges fell below the 13 percent targets that Wall Street analysts expected.
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On the earnings call, Cisco CEO John Chambers explained that a slowdown of sales in the government sector was to blame:
We did see challenges; for example, in the U.S., say, government business, down approximately 25 percent year-over-year from an orders perspective. To give you an idea of how rapid a change this was, the state government business was down 48 percent [from the prevous quarter] from an orders perspective.
Open source competitor Vyatta's CEO, Kelly Herrell, thinks there's more to Cisco's slowing revenue growth than its prospects in the government sector alone. Herrell writes in response to Cisco's results:
Routing was a central focus of discussion by analysts, because it's always been assumed that it was a guaranteed cash cow for Cisco. That's no longer the case; the routing market is changing fast.
Routers are the bulk of the Layer 3 networking market. Layer 3 plays the most crucial role for Internet plumbing. This complex set of protocols enables the connectivity between devices over a distance, and between virtual machines in an integrated or cloud solution. That explains why the market for Layer 3 products is more than 2X the size of the entire market for Layer 4 through 7.
The Layer 3 overhaul is upon us now. But the new wave of Level 3 infrastructure clearly isn't coming from Cisco.
Open source is enabling alternatives to Cisco
Herrell's company of course competes with Cisco's router business, so it's perhaps no surprise that he believes that open source software routers, such as Vyatta's offerings, are threatening Cisco's cash-cow router business. Herrell claims, "Vendors and partners adjacent to Cisco's router business used to recommend or resell Cisco. They no longer have to. Vyatta has removed that barrier and enabled them to add complete L3 functionality as software."
Vyatta's products, which range from the open source and unsupported Vyatta Core to commercial Vyatta Subscription Edition and Vyatta Plus, have been adopted by companies such as CBS, Toyota, and Rackspace. Vyatta serves up nearly 25,000 downloads of its software-based routing technology per month and is closing in on 750,000 downloads in total.