What's Next for This Networking Giant?

Paul Chi, The Motley Fool

Last year was tumultuous for Cisco Systems (NAS: CSCO) . After trading as high as $27 per share in 2010, the stock tumbled all the way down to as low as $13.30 in 2011, before slowly climbing its way back towards $20. Along the way, the company dealt with much scrutiny as investors questioned Cisco's ability to maintain its gross margins as it faced a host of competitors.

Last quarter, the company started the first quarter of its three-year plan aimed at refocusing the company. For the quarter, sales increased 5% year-over-year, ahead of expectations of 1% to 4%. Gross margin, which the company is watching closely, was also up ahead of expectations. Non-GAAP gross margin was 62.4% for the quarter, ahead of the 61.3% expected. When Cisco reports earnings on Wednesday, it expects to grow revenue 7% to 8% YOY.

Cisco takes pride in its ability to adapt to industry trends as they shift, and it has performed quite well over the years, increasing sales and earnings tremendously. However, its success has attracted a lot of competition. In order to get a read on the networking giant's latest quarter and possible short-term outlook, we look at some of its competitors.

A mixed bag for competitors
After reporting weak results last month, Juniper Networks (NYS: JNPR) lost 3% in the next day's trading. Investors had already been warned about the upcoming weak results earlier in the month, when the company lowered its guidance for the fourth quarter ahead of earnings. The weakness was attributed to macroeconomic uncertainty and lack of strength from service providers.

How exactly did Juniper do? Fourth-quarter revenue was up 1% sequentially but down 6% YOY. The company's sales were up 9% for the year and set a new record for annual revenue, but a better fourth quarter could've made the year even better. While the company believes in its longer-term fundamentals, Juniper expects the first quarter of 2012 to be challenging. The company is guiding to revenue for the quarter of $960 million to $990 million, compared to $1.1 billion a year ago.

When F5 Networks (NAS: FFIV) reported earnings, results were strong. Both revenue and earnings exceeded guidance, and the stock jumped 10.6% after reporting. Results were strong in all regions, including 20% growth in the Americas; Europe, Middle East, and Africa growing 14%, and the Asia-Pacific region growing 28%.

In addition to posting solid results in its current markets, F5 is working to expand its potential customer base. The company's software-only virtualizations of its products grew 149% year-over-year, and its comprehensive set of virtual-product additions has significantly expanded its addressable market. As it expands its product offerings, the company is also investing in its personnel so it can bolster its salesforce and R&D capabilities.

Looking forward, F5 is currently targeting 20% revenue growth in fiscal 2012, which ends in September. Despite public-sector weakness in places like the United States and Europe, F5's results are quite strong and look to remain that way for the next year.

Finally, Riverbed Technology (NAS: RVBD) actually reported strong results for its latest quarter, but its guidance spooked investors to the tune of 18.3%. For 2011, the company posted revenue growth of 32% and operating-income growth of 52%. The company continues to gain WAN optimization market share, and now has above 50%. In this space, Riverbed's quarterly revenue is more than double that of its cloest competitor. What's more, the company is planning to release new products to its Steelhead product line in the coming year, which should help maintain or even increase its lead.

That all sounds great, so why were investors spooked? The Steelhead product refresh is the first since 2008, and is expected to cause near-term uncertainty as customers could choose to wait for the new products to come out before buying. This is expected to further decrease sales for the first quarter, which is usually a seasonally weak quarter. The company's initial guidance for the first quarter is an 8% to 10% decline in revenue compared to the fourth quarter, compared to a more-typical 5% to 6%.

The company's still expecting 17% to 20% growth for the full year, which means accelerated growth in the latter nine months. These expectations are in line with Riverbed's previous experience regarding new product launches, which have disrupted sales initially only to see accelerated growth afterwards.

Foolish bottom line
Cisco's competitors' results are a mixed bag. The rapidly growing F5 and Riverbed still expect to grow in 2012, while Juniper is expecting weak near-term results. I fully expect Cisco's fiscal second quarter to be reasonably strong, but I'm looking to expect somewhat modest guidance for 2012 given that Cisco should track Juniper more than the other companies that have reported thus far. It'll be interesting to see how it all plays out when the company reports later this week.

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Paul Chi is an analyst on the Fool's Alpha and Duke Street services. You can follow him on Twitter to stay up-to-date on his latest market commentary. Paul and Matt Argersinger co-manage the Street Fighter portfolio, where they look for cheap, unloved stocks with home-run potential. Paul does not own shares in any companies mentioned.

At the time thisarticle was published The Motley Fool owns shares of Cisco Systems.Motley Fool newsletter serviceshave recommended buying shares of Riverbed Technology and Cisco Systems.Motley Fool newsletter serviceshave recommended writing covered calls in Riverbed Technology. Try any of our Foolish newsletter servicesfree for 30 days. We Fools may not all hold the same opinions, but we all believe thatconsidering a diverse range of insightsmakes us better investors. The Motley Fool has adisclosure policy.

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