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Cisco Report Agitates the Street

SAN JOSE, Calif. ( TheStreet) -- Cisco (CSCO - Get Report), which reported its second-quarter results after market close on Wednesday, still has plenty of work to do before it resolves its recent problems.

The networking giant beat Wall Street's revenue and EPS estimates, but posted a gross margin that missed analysts' forecast. Cisco also offered weak guidance, pummeling the company's shares in extended trading after its report. In afternoon trading Thursday, the company's stock was down more than 13% at $19.12.
Cisco CEO John Chambers

Speaking on a conference call after market close on Wednesday, Cisco CEO John Chambers identified weakness in the company's consumer and switching businesses. The latter, he said, was negatively impacted by pricing pressure and multiple product transitions.

Set against this backdrop, Cisco's gross margin came in at 62.4%, below the 63.3% Wall Street was looking for.

Analysts are now concerned that Cisco is struggling to shake off its recent spending and execution problems.

"We believe half of the gross margin decline was temporary (due to a worse consumer mix and inventory write-downs), but we view the other half as structural and likely to persist," wrote Goldman Sachs analyst Simon Jankowski, in a note released on Thursday. "In particular, about one point of the decline was due to a negative mix shift and pricing pressure in Cisco's core switching business."

Jankowski, who has a neutral rating on the switchmaker, lowered her 12-month Cisco price target from $23 to $21. "[Cisco's] gross margin is guided to stay at that depressed level of 62%-63% over the next two quarters despite a robust revenue ramp, and below prior expectations," she explained.

"We came away from the [conference] call incrementally negative on Cisco given fear that our medium- to long-term competitive pressure concerns are here today," said Jayson Noland, an analyst at Robert W. Baird, in a note. "Product pricing, mix and product transition issues were cited [for the gross margin decline], though we can't help but be concerned with competitive pressure from HP (HPQ - Get Report) Networking."

Noland still rates Cisco market outperform, albeit with reservations. "We are keeping a less enthusiastic Outperform rating given overall solid demand trends against discounted valuation metrics."
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