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Cisco: Down But Not Out

Everyone awaited the earnings release of Cisco a few weeks ago. Would it have a blow-out quarter? Or, would there be ominous signs of problems?

Well, Cisco is highly skilled at managing its earnings. Hey, the company can do a virtual close of its books on a daily basis. Consider this: Cisco has beaten Wall Street expectations for the past 13 quarters by a mere one cent each time.

The past quarter was definitely strong. Net income was $1.36 billion on sales of $6.52 billion in sales. During the same period last year, net income was $814 million and sales were $3.92 billion.

On the conference call, Cisco expects to show 50 to 60 percent revenue growth for the next year. For a company of Cisco's size, such growth is astonishing. But as we have seen in the past few months, nothing seems to satisfy Wall Street. Cisco's stock, as a result, has been treading water.

But there are legitimate concerns. No question, the future is optical communications. However, despite a variety of acquisitions (such as the mega purchase for Cerent), Cisco is still lacking.

Look at terabit routers. These allow for the relay of data across optical networks. True, Cisco has a line of terabit routers. The problem is that Juniper has better technology. Its router can process IP at OC192, which is 10 Gbts per second. As a result, Nortel signed a huge alliance with Juniper.

Moreover, while the optics market is growing at break-neck speed, it is different from Cisco's traditional customer base. After all, it is telecom providers that make big purchases of optical networking equipment. In fact, there is very little customer loyalty; rather, customers look for the best technology.

But Cisco is undoubtedly going to strike back hard against Juniper. For example, Cisco recently hired its former CTO, Ed Kozel. He was the person that transitioned Cisco from start-up to router dominator. He will be the CTO of the service provider business line.

Also important is the fact that Cisco has a world-class M&A team with immense experience. Expect more optical merger deals, especially with recent valuation weakness in the sector. This will help fill out the company's product line.

And according to the company's chief strategy office, Mike Volpi, Cisco will be introducing an OC192 product to compete against Juniper (either in December or January). Apparently, interest level is very high. If Cisco can make substantial inroads, it could be catalyst to move the stock.