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Steady as she goes at Cisco

Cisco Systems CEO John Chambers paints a rosy picture to financial analysts that's at odds with an ongoing malaise in the communications industry.

SANTA CLARA, Calif.--Cisco Systems Chief Executive John Chambers painted a rosy picture to financial analysts Tuesday that is at odds with an ongoing malaise in the communications industry.

Ever hopeful about his company's prospects, Chambers struck a confident but realistic tone as he attempted to allay the financial community's fears about Cisco, one of the best-performing stocks and fastest-growing large companies of the 1990s. The maker of much of the networking gear for the Internet and corporate networks has fallen on hard times amid a spending slump in the telecommunications industry.

"I think Cisco historically has tried to focus on the future," said Paul Sagawa, equities analyst for Sanford C. Bernstein. "I think we're back to that again--to get people excited about what's going to happen in the long term."

Chambers was also upbeat at last year's annual analyst conference amid signs that a prolonged boom among telecommunications companies and their suppliers was coming to an end.

What a difference a year makes.

Cisco's stock, which was trading at $55 a year ago, now hovers around $20 after dipping into the teens. In 2001, the company reported quarterly losses, negative growth, more than $2 billion in write-offs for assets with no value, and announced 8,000 layoffs--all troubles Cisco had previously been immune from.

"A year ago, Cisco was in denial that something might happen," Sagawa said.

The biggest financial news uttered at the conference was Chambers' disclosure that orders for November--the first month since Cisco's most recent earnings announcement--were "linear and on expectations," a sign for some that business has stabilized.

Chambers also acknowledged that Cisco had been "surprised" by the rapid contraction of the telecommunications market, during which numerous companies ran out of funding and could no longer operate their networks or purchase new gear.

"Once we were surprised, we said, 'What can we do to quickly adjust?'" he said.

Cisco's executive team has continually suggested that the downturn will play into Cisco's favor, allowing it to "break away" from competitors as part of a strategy to gain market share against traditional rivals such as Nortel Networks and Lucent Technologies, as well as smaller companies such as Extreme Networks and Juniper Networks.

"Our ability to break away got larger during the transition," Chambers said.

Cisco has said it will focus on new growth markets such as wireless networking and voice-over-Internet technologies to drive growth amid the downturn. In addition, Cisco has benefited from its large presence among corporations, a market largely ignored during the boom by the likes of Nortel and Lucent.

Analysts said that even though the company has been through the first travails in its history, it remains at the top of the list in terms of networking companies.

"I still come away impressed that Cisco is a well-run company," said David Passmore, research director for industry consultants the Burton Group. "I see them mostly sticking to the strategy they've laid out and powering through."

Chambers "is not promising the world," Passmore said.

Chambers declined to comment on expectations for Cisco's current quarter, noting that the lack of comment in itself sent an "important message." He said it was likely the company would acquire eight to 12 companies over the next year, echoing earlier statements. He did, however, suggest that he's been "critical" of the company's inability to acquire a market-changing company, such as optical gear maker Cerent, in the past two years.

Chambers also said Cisco has not done a good job attracting business from the four incumbent local exchange carriers, or ILECs. Those companies include SBC Communications, Verizon Communications, Qwest Communications International and BellSouth.

Separately, Cisco announced a new strategy for optical networks targeted at marrying the Internet to traditional telecommunications systems. Dubbed "Comet," the effort includes the expected release of a new optical system for long-haul networks, called the ONS 15808. The new gear will be installed at start-up network operator Velocita.

Also, Cisco announced a deal for metropolitan optical gear with Williams Communications. Terms were not disclosed.