Networking king Cisco Systems (CSCO) this month reported results that buoyed Wall Street but raised questions about one of its key products.

Cisco revealed slower growth in its router business, gear that helps manage traffic on the Internet and other networks. Router revenue rose 8% year over year for the quarter ended July 26, down from 14% growth the previous quarter.

That growth far lagged recent results of No. 2 networking gear maker Juniper Networks. (JNPR) For its quarter ended June 30, Juniper reported a 43% jump for its unit that mostly sells routers.

Analysts say Cisco, more so than Juniper, sells to users other than telecom and cable firms, companies more inclined to put off purchases during the economic downturn. Still, analysts also say Cisco needs to update some of its routers to better compete with Juniper.

"I thought this year I would have seen an update," said Mark Seery, an analyst at research firm Ovum. "They've been behind Juniper."

Even John Chambers, Cisco's chief executive, recently gave Juniper kudos — not something he does often with competitors.

"I do . . . want to congratulate Juniper," Chambers said on the conference call with analysts after Cisco released its latest results. "They had a very good quarter."

He also vowed that Cisco would step up.

"We do have to make it a little bit tougher for them in a couple of the . . . accounts, and we understand where those are, and we will do a little bit better job competing in those," Chambers said.

He said he expects Cisco to close any product technology gaps with rivals.

"There might be very short gaps where somebody might have a feature or temporary advantage," Chambers said. "I think over time, you'll see us continue to be the clear leader in routing in all categories."

Routers and switches contribute more than half of Cisco's sales.

Bigger Growth Of Late

Routers direct the flow of data over the Internet and other computer networks. As more video and high-end graphics get sent over these networks, the overall router market has been healthy. Quarterly sales have grown by at least 30% year over year since the start of 2007, up from roughly 20% mid-decade, Seery says.

There are two basic types of routers that target service providers such as telecom and cable firms. The most heavy-duty are called core routers, which handle high-traffic areas. Edge routers aren't usually as powerful and often handle more specialized jobs.

Cisco and Juniper essentially own the core router market. Cisco's newest core, the CRS-1, was rolled out in 2004 but remains a big hit. Its sales rose 85% last quarter vs. the year-earlier quarter. Core routers can be multimillion-dollar products with long sales cycles, so they aren't updated often.

But edge routers are a different market. Cisco faces more challenges in edge routers from Juniper and, to a lesser extent, Huawei Technologies, Alcatel-Lucent (ALU) and others, Seery says.

Juniper's newest edge router — the MX family, rolled out from late 2006 through early 2007 — is a hit. Analysts say it's simple to manage and works well with other routers.

Juniper's 'Sweet Spot'

Juniper is likely taking market share from Cisco in edge routers, says Kenneth Muth, an analyst at R.W. Baird. Until Cisco comes out with newer edge routers, that will probably continue, he says.

"Juniper is in a very sweet spot," Muth said.

He says Juniper's newest routers are especially well suited for handling new video features for service providers such as AT&T (T) and Verizon Communications. (VZ)

Eve Griliches, an analyst at research firm IDC, says Cisco slightly gained market share among service providers — telecom and cable companies — last quarter. But she says the gain stemmed from Cisco's strong core routers "making up" for challenges with its edge routers.

"I think they're overdue for products in this (edge) area," Griliches said. "Juniper has continued to deliver new products."

Cisco is likely developing new edge routers, analysts say, though some say those products are nearly a year away from rollout.

There "appears to be little hope" for something in the next two to three quarters, said Citigroup analyst Paul Mansky.

Kim Perdikou, executive vice president of the infrastructure products group at Juniper, says her company saw an opportunity with the new edge routers and took it.

"I have great respect for (Cisco) and what they've done globally in networking," Perdikou said. "We don't attempt to go after every customer Cisco has. We focus on (accounts) where high-performance networking actually matters."

She says demand for more capable routers is driving sales. Rising demand for video, voice and other applications over the Internet are increasingly taxing routers.

Demand isn't likely to dry up, even in the face of an economic slowdown, IDC's Griliches says. Cable and telecom firms need to deploy routers as they battle for the same customers. Telecom carriers are selling TV services, cable firms are selling phone services.

"It's defensive spending, which to a certain extent is recession-proof," Griliches said. "They have to keep making their networks better."

Source:investors