Cisco's outlook doesn't look bright

Chambers says market still heading south

Although many had hoped for some positive words about the coming months from Cisco Systems last week, investors got more bad news when President and CEO John Chambers said the company is looking at more quarters of little or no growth.

“While we would like to say the bottom has been reached, I don't think we are there yet,” said Chambers.

Chambers predicted revenue in the next quarter will be flat to down an additional 5%. And although Cisco met revenue estimates for the quarter, its revenue and profits fell off sharply from the previous year's quarter. Cisco had a profit of $163 million, or 2¢ for the quarter, but that is in harsh contrast to the same quarter last year, which rang in at $1.20 billion in profit, or 16¢ per share, yielding an 86% drop. Net income for the quarter was $7 million, compared with $796 million last year.

Despite the poor quarterly numbers, Chambers said the U.S. market is showing signs of leveling out, with an uptick in the enterprise market rather than the service provider market. Chambers also cautioned that although the U.S. market could be recovering, the European and Asian markets could get worse before they get better and drag the U.S. into another downturn.

Symptomatic of the U.S. service provider market is an expected continued slowdown of the optical networking equipment segment.

Cisco missed the mark on optical networking equipment sales, with plans for the segment to reach between $3 billion and $7 billion for fiscal 2001.

Chambers conceded that while the run rate for optical networking equipment is up significantly from last quarter, it is nowhere near a billion dollars.

“Orders [from service providers] have decreased sequentially. The number of requests for proposals and size of them has absolutely gone down,” Chambers said.

Orders [from service providers] have decreased sequentially. The number of requests for proposals and size of them has absolutely gone down. --John Chambers, Cisco

Cisco is now banking on getting “design wins,” said Mike Volpi, chief strategy officer for Cisco. “We are not clear as to when the revenue will flow in from those,” Volpi said.

Cisco recently announced a deal with Qwest Communications, but the RBOC hasn't turned in its order for products yet, according to Shin Umeda, principal analyst for the Dell'Oro Group. “We are just not seeing the large scale purchases. Providers are buying much more cautiously,” Umeda said.

Although Cisco's optical sales have tapered off, competitors believe the market is still healthy.

“We believe the optical networking [market] is alive and well,” said a Ciena spokesman. “There is just a shift from old technology to new.”

“[Cisco] was first to market with the next generation Sonet product, but now most of the major vendors have a product to compete with it,” Umeda said. They don't have the breadth of the product line in optical equipment that others have.”

That could signal Cisco's optical retreat (see figure).

Total intelligent optical  networking market share
Ciena	25%
Lucent	14%
Nortel	12%
NEC	11%
Cisco	10%
Alcatel	10%
Corvis	5%
ONI	4%
Sycamore	3%
Redback	2%
Tellium	2%
Sorrento	1%
Marconi	1%
Source: The Aberdeen Group

Despite the optical downfall, Cisco did manage to improve its market share for routing equipment against competitor Juniper Networks. Chambers pointed to a 3% to 5% gain in market share back from Juniper.

All the major vendors need to be watchful of the start-ups that aren't expected to have product for 12 to 18 months, according to John Coons, vice president of Gartner Dataquest. “At the point when things turn up, there may be an interesting change coming,” Coons said.

On the macro scale, Cisco reported fiscal year 2001 sales of $22.9 billion, an 18% increase over fiscal 2000 sales of $18.93 billion. The actual net loss for 2001 was $1.01 billion or 14¢ per share, compared with actual net income of $2.67 billion or 36¢ per share for fiscal 2000.