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Cisco discounts Nexus 7000 switch -76% to win Purdue University's Hansen Cluster bid
Mon, 8/1/11 - 9:04pm    View comments

Update 8-11-11:

Network World - Purdue's hefty switch discounts 'unusual,' Cisco says

Update 8-8-11:

Network World - How is the Cisco 76% off Nexus sale going over with customers? Not well
 

Today, RBC Capital Markets Managing Director - Mark Sue stated:

"In its core market of switching (30% of revenues but ~50% of profits), Cisco may be aggressively pricing deals."

So exactly how aggressive has Cisco recently been in the pricing of its Nexus 7000 switches?

Well, on June 2, 2011 Cisco won the bid on Purdue University's Hansen RFP 250 Nodes Project with a unique twist highlighted in its RFP response as shown below (page 3 at the bottom):

"Trade In

"Due to the relationship between Purdue and the Cisco account team, we know of several out of commission and very old WS-C2950G-48-E1's and WS-C4507R's that have no value in the market place. However, these unused devices do have value to Cisco in relation to the Hansen Cluster. Therefore you will see a trade in discount in our response. This is mainly to provide a focus on the Purdue deal and not allow the general public to obtain a similar pricing structure. There is no cost to Purdue for shipping or handling of this product."

So how much of a trade in discount (it's my understanding that Cisco may bill trade in discounts as a sales and marketing expense) did Cisco provide Purdue University for several of Purdue's out of commission and very old Cisco switches that have no value in the market place?

On page 4 of its winning bid, Cisco listed the quantity of each Nexus 7000 Switch Part Number sold to Purdue University and according to Cisco's own Nexus 7000 switch price list (page 31 dated July 11, 2011) the total USD list price of Cisco's Nexus 7000 switch sale to Purdue:

$1,094,793

The total amount of Cisco's Nexus 7000 switch bid that won Purdue University's June 2, 2011 RFP which includes the primary compute system network, warranty and licensing, shipping and installation:

$254,600

That works out to a -76.7% price discount (i.e. -$840,193)

In my personal opinion, this is a major game changer because Cisco's customers now have a powerful new tool for negotiating with Cisco on upcoming Nexus 7000 switch deals.

Finally, I've asked Cisco for an "official response" as to whether it is artificially inflating switch gross margins by using huge trade in discounts that are then later billed as a sales and marketing expense (Cisco's sales and marketing expense during the most recent 9 months increased +$878 million up +13.6% on a +$2.8 billion total net sales increase up +9.6%, page 4, over last year).

For example, according to Cisco's most recent 9-month financial statement (Page 38):

Switches represented 31% of Cisco's total net sales (9,982 / 32,023).

31% of Cisco's total sales and marketing expense growth is $272 million (.31 x $878 million).

Cisco's switch sales grew by only $111 million (9,982 - 9,871).

$272 - $111 = $161 million

The portion of Cisco's marketing and sales expense growth attributable to switches grew $161 million more or 245% more than Cisco's switch sales grew (111 x 2.45 = 272).

I mean, it certainly appears to me that Cisco is artificially inflating switch gross margins by using huge trade in discounts that are then later billed as a sales and marketing expense!

Of course Cisco never responded to my request.

Fortunately, Cisco did officially respond to Network World on 8-11-2011:

Purdue's hefty switch discounts 'unusual,' Cisco says

Gee, if only I had Network World's clout, oh well.

Cisco's winning bid

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Purdue's hefty switch discounts 'unusual,' Cisco says

How is the Cisco 76% off Nexus sale going over with customers? Not well

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Cisco's Q4'FY11 operating cash flow, product gross margin and router sales sequentially declined

What's your take?

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