Cisco wins back Merrill Lynch

The networking giant announced during its second-quarter fiscal 2005 conference call on Tuesday night that it has won a deal to supply all Merrill Lynch branches with telephony gear based on Internet technology. Cisco has been supplying Merrill Lynch with IP telephony equipment since 2000, but last year, the company's products were replaced in Merrill Lynch's main New Jersey office and an office in Japan with equipment from Avaya. At the time, Merrill Lynch blamed the problems on its integration partner and not Cisco's technology.

Since then, Merrill Lynch has used a mix of Cisco and Avaya products in its network. Now Cisco appears to have won back the lion's share of Merrill Lynch's IP telephony business. Its equipment will be deployed to support 14,000 financial advisors in 600 Merrill Lynch offices nationwide.

"As far as I know, we will be the only suppliers of IP telephony gear for this deployment," said Charles Giancarlo, Cisco's chief technology officer in a telephone interview. "The last situation (when Cisco gear was replaced with Avaya products) was only one corporate location in New Jersey with about 2,000 end users."

The Cisco IP telephony products, which include new Cisco handsets and its CallManager software technology, will replace existing PBX-based phone systems at these locations. Cisco's voice over IP (VoIP) products will allow Merrill Lynch to collapse its voice and data networks onto one single network. It will allow employees in all of Merrill Lynch's branch offices to make phone calls that will travel over the same Internet protocol network used to transport data traffic.

Cisco CEO John Chambers said during the conference call that his company had hit a record of 550,000 phone shipments in the fourth calendar quarter of 2005. Altogether, Cisco claims to have shipped more than 4 million IP phones worldwide.

Although his tone on the call was cautious, Chambers said he was encouraged by the activity among corporate customers in the United States, especially when it comes to migrating to IP telephony.

"We are seeing more corporate customers looking at systems and the total cost of ownership," he said. "They are getting more aggressive on the adoption of new technologies, particularly when it comes to voice, video and data convergence."

Today, Cisco has more than 20,000 enterprise customers using its IP telephony products, with more than 50 of those customers having deployed more than 5,000 phones. Last year it announced major contracts with Bank of America, Boeing and Ford, which each plan to install more than 150,000 Cisco IP Phones.

While Cisco has ramped up sales of its IP telephony products during the past year, it still faces stiff competition from competitors such as Avaya, Alcatel, Nortel Networks and Siemens.

Avaya, which was spun off by Lucent Technologies in 2000, has steadily gained on Cisco's market dominance for the past year and a half. The company has taken a different approach from Cisco. Instead of forcing customers, to rip out their old phone networks and use only an IP network, it allows customers to continue to use their existing phone system while gradually migrating toward IP. The strategy seems to work with many customers who are nervous about abandoning their existing phone networks.

Doing the math
The rest of the news on Cisco's earnings call was not quite as positive as its customer announcement.

While revenue rose about 12 percent to $6.06 billion, it fell just shy of analysts' average forecast for sales of $6.12 billion, according to Reuters Estimates.

For the current quarter, the company said it expects revenue to be flat to up 2 percent over the second quarter. Analysts' were expecting revenue growth of just under 3 percent.

Even though Cisco met most analyst expectations, analysts were unimpressed by the company's dip in gross profit margins. The company reported gross margins of 66.8 percent for the quarter compared to about 67.2 percent the previous quarter. Two years ago the company reported grows margins around 70.8 percent.

On a conference call with analysts, Chambers said that third-quarter sales growth will probably stay level or rise no more than 2 percent from the second quarter. But the company expects total yearly growth to be as much as 15 percent.

Reuters contributed to this report.