Cisco's Storage Slows

11:50 AM -- Despite posting a strong set of Q1 results, Cisco's storage growth has slowed significantly, suggesting that the networking giant is engaged in a fierce market battle with Brocade. (See Cisco Reports Q1 and check out our latest poll.)

The networking vendor has been increasingly focusing its efforts on the storage market, recently unveiling its Wide Area Application Services offering in an attempt to tap user demand for storage and server consolidation.

Cisco's storage push has historically brought results, with the vendor's storage division experiencing 65 percent growth last quarter, thanks largely to the strength of its switch and director business. (See Cisco Rattles Storage Sabre, Cisco Goes 4-Gig & Big, and EMC Certifies Cisco Director.)

But the vendor's Q1 results, released last night, show Cisco's storage growth slowing to the mid-teens, although execs on a conference call painted a rosy picture of their storage business. "We're getting huge market share [on storage]," said Cisco CEO John Chambers, explaining that he expects strong growth in the future.

Cisco execs on last night's call did not explain the reasons for their storage slowdown, though Brocade has been enjoying strong demand for its own director products, suggesting that the networking vendor may be coming up against some stiff competition. (See Brocade Reports Earnings.)Despite the slowdown, at least one analyst believes the figures show that Cisco is still getting its storage message across. "We believe [storage growth] reflects the acceptance of the company's 4-Gbit/s 528-port MDS 9513 Director, as well as some benefit from the disruption ahead of the Brocade/McData merger closing," said Aaron Rakers of A.G. Edwards in a note this morning. (See Brocade Bags McData For $713M, Brocade Buys McData, and Users Ponder Life Under Brocade.)

Storage is still only a tiny proportion of the vendor's overall revenues. Although Cisco did not break out its specific storage figures, Rakers estimates that Cisco's storage sales amounted to around $125 million in its first quarter, a mere drop in the ocean compared to the vendor's overall revenues of $8.2 billion.

Going forward, branch office storage consolidation looks set to be a key part of Cisco's storage push. "In terms of the application delivery platforms, we are actually seeing very good uptake on that," said Charlie Giancarlo, the vendor's chief development officer, in response to a question from an analyst last night. "We do believe that we are picking up a fair amount of momentum in that space as companies attempt more and more to really leverage the investments that they are making in Web-based applications."

Overall, Cisco posted a strong set of results, with Q1 revenues of $8.2 billion up almost 25 percent year over year. This also beat analyst expectations of $7.9 billion. Cisco's earnings per share were 26 cents on net income of $1.6 billion, up from $1.3 billion and 20 cents in the year-ago quarter.

On a non-GAAP basis, the vendor's earnings per share were 31 cents on net income of $1.9 billion, up from 25 cents and $1.6 billion in the same period last year. Analysts had estimated earnings of 29 cents per share.The vendor also managed to avoid some of the problems that have recently dogged other storage vendors in Europe. (See Symantec Slips in Europe.) "The improvement that we saw in Q4 in our European operations continued in Q1 with very solid year over year growth, comfortably in double-digits," said Chambers on last night's call. "The three large countries -- United Kingdom, Germany, and France -- all grew in the mid-teens or better."

The CEO did allude to the "mixed results" experienced by competitors in Europe and admitted that it is too early to tell whether Cisco's growth trend will continue in that market.

In early trading today, Cisco shares rose $1.77 (7.09 percent) to $26.88.

James Rogers, Senior Editor, Byte and Switch