As one of its more challenging years comes to a close, networking giant Cisco Systems will try to reassure investors Monday that it can sustain its
streak of strong financial results.
Cisco executives are expected to paint a rosy picture for the coming year despite a muddling stock price, growing
competition from rival companies, and a potential slowdown next year in
network equipment purchases by telecommunications carriers and Internet
The company will lay out its business strategy for the next year at its
annual financial analyst meeting, a two-day affair that begins Monday in
San Jose, Calif. Executives are expected to reiterate that Cisco plays in
enough high-growth markets to stave off the financial woes that have afflicted rival Lucent Technologies, among others.
"All those negative issues are out there, but Cisco seems best positioned
to weather through them," said SG Cowen analyst Michael Jung. "They're the
most diversified company and can weather downturns. They have the largest
breadth of products, a well-diversified geographical presence, and their
markets are split between corporate and service providers."
Investors have questioned the health of the networking industry lately as
some Wall Street analysts have predicted a slowdown in telecommunications
and network equipment sales next year. Emerging service providers, such as
Covad Communications, PSINet and NorthPoint Communications, have
struggled, which could slow or stop the pace of equipment purchases,
Wall Street is increasingly watchful of the effect of these flailing
businesses. While Cisco rival Nortel
Networks beat earnings last quarter, for example, it missed some sales projections by
analysts as sales of its flagship optical network equipment grew less than expected.
For Cisco, its falling stock price raises questions about whether the company will have to retreat from its long-running strategy of buying companies to enter new, high-growth marketing niches, such as optical networking equipment.
Despite seeing its stock price fall from about $70 in mid-July to its current $48.50, the company has said repeatedly that it will continue its shopping spree.
In addition, emerging companies such as Juniper Networks have been nipping at
the company's heels, stealing market share from areas Cisco has historically dominated. In its two years selling equipment, Juniper has captured 30 percent market share for high-speed networking devices that manage heavy Net traffic for carriers, while Cisco's market share has eroded to 68 percent, according to a recent report by the Dell'Oro Group.
Most analysts, however, remain upbeat on Cisco's future. Morgan Stanley
Dean Witter, for example, maintains a "strong buy" rating for Cisco's stock,
with a 12-month price target of $75.
Stock price from December 1999 to present.
Source: Prophet Finance
"Given the company's historically consistent earnings results, Cisco could
be a safe haven for tech investors in what has been a very volatile
market," Morgan Stanley analyst Christopher Stix said in a
Analysts said Cisco is equally strong in sales of equipment to both service
providers and corporations, protecting it from potential cutbacks in
service provider spending in the next year. Cisco, which garners the
majority of its revenue from corporate sales, expects companies to increase
spending for networking equipment in the coming year.
Nine of Cisco's 12 product families have an annual run rate of
$1 billion or more, said A.G. Edwards analyst Peter Andrew. So if sales
become weak in one area, other market segments can pick up the slack.
For example, Cisco last quarter said sales of high-speed Net access
equipment were weaker than expected because emerging service providers were
spending less, Jung said. "They did see that as weak, but despite that,
they had a good quarter."
In contrast, Lucent's and Nortel's revenues are tied mostly to service
provider sales. In recent times, both have suffered from
slower-than-expected sales of optical equipment.
Analysts expect Cisco to capture a good chunk of new, emerging
markets, such as home networking, wireless equipment sales to service
providers, and new networking hardware that will allow businesses to
combine voice and data over a single network.
"We continue to believe that the market is moving more and more toward
Cisco," Andrew said in a recent report.
Nevertheless, some analysts question whether the company can continue its
strong revenue growth rates each year.
Cisco in November upped its
forecasts for its current second quarter and the 2001 fiscal year.
Sequential growth will hit single or low double digits, while revenue for
the fiscal year is expected to grow between 50 percent and 60 percent.
Jung estimates Cisco's yearly revenue will grow 58 percent next year, after
the company's yearly revenue grew 32 percent in 1998, 43 percent in 1999
and 55 percent in 2000.
With overall revenue a bigger number each year, Jung expects sales growth
to decline to the 25 percent to 30 percent range in 2002 and 2003. "No one is expecting a 65 percent growth increase every year. That's against the law of large numbers," he said.