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Competitors lick chops as Cisco stumbles

With Cisco Systems facing unprecedented financial woes, rival networking companies are hoping they can take advantage and nab market share while the giant is down.

With Cisco Systems facing unprecedented financial woes, rival networking companies are hoping they can take advantage by grabbing market share while the giant is down.

Cisco executives historically have believed they could maintain momentum and stellar revenue growth even in hard times. But the turbulent economy has knocked Cisco's confidence down a notch as sagging sales of networking equipment have forced it to reorganize, lay off employees and tone down revenue expectations.

Shares in the company were up 39 cents by market close to $15.60, down from a 52-week high of $77 and not far from a 52-week low of $13.18.

Other networking companies say Cisco will always be a formidable competitor. But with its luster slightly tarnished, competing companies, particularly smaller but successful players such as Foundry Networks and Riverstone Networks, say they have a shot at grabbing market share, even though they face the same economic issues as their bigger rival.

"The good news for Cisco is there's not too many other companies who aren't hurting as badly as they are," said Lehman Brothers analyst Steven Levy. "But any time a market leader has to make significant changes to their modus operandi, it creates a dislocation--and that gives opportunities for others."

Foundry Networks Chief Executive Bobby Johnson says Cisco has often won sales deals by arguing to customers that it's on stronger financial footing than its rivals. Now Cisco can't do that, he says.

"Cisco competes in a (customer) sale by arguing, 'We're bigger, and you know we'll be around,'" Johnson says. "They attack us on size and the longevity issue. But we just celebrated our ninth consecutive quarter of profitability. We can claim we have...the financial staying power as well--that Cisco is not the only game in town."

Cisco ranks first or second in market share in many major product categories, but the company has had to fend off every other networking company to get there. For example, hard-charging Juniper Networks has captured about 33 percent of the high-speed Internet router market, while Cisco has about 60 percent. Cisco owned virtually all of that field several years ago.

Cisco Chief Executive John Chambers has argued that even in difficult times, Cisco can continue to break away from its competition because of its larger portfolio of products. Even with smaller players such as Extreme Networks nipping at its heels, Cisco has stayed strong in the past few years with revenue growth accelerating as the company got bigger. In the past year, for example, Cisco had quarterly performance of more than 60 percent growth.

Same strategy, new focus
Like others in the technology sector, networking companies have been pummeled by the U.S. economic slowdown that has dashed sales of networking hardware to businesses and telecommunications service providers. Nortel Networks, Lucent Technologies and 3Com, for example, are in the midst of layoffs.

Cisco, however, can argue that it is more focused than ever in key markets now that it has killed off three products that weren't generating immediate revenue. Cisco earlier this month discontinued the optical router it gained from its 1999 purchase of Monterey Networks. And earlier this week, the company axed video products from its acquisition of PixStream and discontinued Internet-based networking equipment that it acquired from buying Israel-based Hynex.

"Cisco's strategy remains the same:

Gartner analysts Jay Pultz and Mark Fabbi say Cisco Systems has long charged a high premium for its offerings, but customers are beginning to question the validity of such pricing.

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to deliver the best products that service provider and business customers need in high-growth markets," said a Cisco spokesman, referring to markets such as Internet telephony, optical networking equipment, and hardware that speeds content over the Web.

Instead of focusing its efforts against every networking company, Cisco will have to concentrate on its bigger rivals, such as Nortel, Lucent and emerging players like Juniper. Juniper continues to steal market share from Cisco in the business for high-end routers, technology that sends data through the Net at high speeds.

"Juniper shows up on Cisco's radar screen, but someone smaller like Riverstone won't," said Lehman's Levy.

Riverstone, which focuses primarily on networks for metropolitan areas and Internet service providers, had $35.1 million in sales last quarter and expects sales growth to increase 20 percent to 25 percent sequentially in the next year.

Cisco is "a formidable competitor and will always do billions of dollars every quarter," Riverstone Chief Executive Romulus Pereira said. "But Cisco has to find $7 billion each quarter. It's a lot easier for us to find $35 million. So while we're suffering in the same market, we can operate under the effects of the macroeconomic trends. We can grow.

"Cisco altitude is at 38,000 feet. We're at 20,000 feet. They're running into the choppy weather up there. We're not in the middle of the storm."

Duking it out
While Nortel has made rumblings that it, too, can take advantage of Cisco's problems, analyst Ryan Sullivan, of Landenburg Thalmann, said all the big networking players--Cisco, Nortel and Lucent--are in the same boat.

"The best-positioned players are the midtier companies--Juniper is great, Sycamore (Networks) looks good. Those companies have cash, a product niche, and a more focused business," Sullivan said. "They have their engineers focused on a specific niche, and they can leapfrog the Ciscos and Lucents."

Overall, the networking industry may consolidate during the downturn, especially with start-up networking companies potentially running out of funding. The larger companies, such as Cisco and Nortel, will survive, and so will younger networking companies that have emerged in the past few years, such as Juniper, Foundry and Extreme, analysts say.

For example, Sycamore has more than $1 billion in cash and investments. Redback Networks has about $433 million, and Foundry has about $252 million. Others, such as Extreme, have about $160 million in cash.

But as networking companies duke it out for customers in a dismal economy, they expect tough competition from Cisco.

"Anyone who thinks that Cisco is not a successful company or that John Chambers has somehow forgotten how to be so would be sadly mistaken," Juniper Networks Chief Executive Scott Kriens said in an interview earlier this month. "That's a quality company, and we expect them to do extremely well."