Against Backdrop of Lousy Economy and Emerging Threats, Cisco Reports Q4

Cisco Systems will report its quarterly results Wednesday after the markets close in New York against the backdrop of interesting times — interesting, that is, in the Chinese curse sense of the word.

While the consensus of Wall Street analysts points to earnings of 46 cents per share on sales of $11.6 billion, up from 40 cents on $11.2 billion a year ago, the ongoing worries about the state of the economy and the persistent troubles in Europe can’t help but weigh things down a bit. Having a significant geographical portion of your market melting down makes for a tougher turnaround.

So tough that analyst Brent Bracelin of Pacific Crest Securities worries that the Street might be too optimistic in forecasting flat sales for the quarter ending October. The weakness in Europe combined with currency effects could prompt Cisco to forecast sales that decline year over year by as much as 3 percent.

Worse for Cisco and its CEO John Chambers, there are new threats emerging. Both Oracle and EMC are making moves in a new area of networking technology that could make the specialized networking hardware that forms the backbone of its business obsolete. So far, software-defined networking has been best personified by Nicira, the start-up that VMware acquired for $1.26 billion last month, or Xsigo Systems, acquired by Oracle seven days later. Software-defined networking turns otherwise commodity hardware into a customized piece of networking gear and puts all the intelligence of creating a network in software.

While it’s not an immediate danger, the fact is that Oracle and VMWare — and thus VMWare’s largest shareholder, EMC — now represent a new competitive threat. “Cisco needs to respond with its own offensive on how it plans to help redesign the legacy IT stack,” Bracelin writes.

That means more acquisitions. Cisco has always been fairly acquisitive. For example, on July 31 it closed its $5 billion deal for the Israeli video software concern NDS. But Bracelin would like to see more deals closer to the data center.

“With the IT industry on the verge of the next major transition to a cloud computing architecture, Cisco is in an enviable position to expand into new adjacent markets,” he writes. “However, the growing disconnect between Cisco’s slowing growth and that of other large enterprise suppliers suggests that it faces increasing competitive pressures and product transition risks.”

Interesting times, indeed.