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The good, the bad and the ugly of Cisco’s cutting its growth

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At an analyst day on Tuesday, Cisco said its sales would grow by 5 to 7 percent through 2014, cutting its revenue growth targets in half and signaling the end of its massive restructuring effort.

The move sent the stock up, as Wall Street apparently felt comfortable with where Cisco has ended up after layoffs and cutting 10 business lines, including the Flip camera division and the Eos media software division.

A successful and quick restructuring is a positive for the networking giant, but there are some cautionary notes around Cisco’s gross margins. Mark Sue with RBC Capital Markets wrote in an analyst note that Cisco said its gross margins, which have decreased from the 70 percent range to about 65 percent, will stop falling at between 62 and 60 percent. That’s not great, but it could get ugly, as Nikos Theodosopoulos, an analyst with UBS, noted. From the UBS research note:

A key risk to Cisco’s long-term GM may be Switch assumptions. Cisco expects Switch [margins] to remain above avg, which may depend on price/competitive actions by Huawei, HP, Dell, Juniper, Brocade and others. All in, we think Cisco’s position is strong, and JNPR may be most vulnerable to Cisco competitive actions near-term.

So there you have it: the good, the bad and the ugly of Cisco’s lowered growth estimates. If Cisco can focus on its core businesses, perhaps the ugly scenario doesn’t play out and it can indeed keep gross margins in the respectable 60 percent range. Investors can mourn the loss of high growth from the network giant, but slow growth is better than no growth, especially if it can keep those margins.