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Commentary: Opportunities in Cisco's earnings miss

Cisco's quarterly results indicate that the economic slowdown is still spreading, but this slower-growth period provides opportunities for tech vendors and other companies to take market share.

Cisco System's quarterly results indicate that the economic slowdown is still spreading, but far from signaling a general retreat, this slower-growth period should provide opportunities for tech vendors and other companies to take market share.

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Cisco vs. the world
Although Cisco's year-to-year gains in quarterly revenue (55 percent) and profitability (48 percent) are certainly impressive, these results are a considerable drop from the company's historical growth rates.

In the current environment, users and vendors should not head for the bomb shelters by imposing across-the-board investment cuts. For companies with excellent infrastructures and organizations, an economic slowdown represents an opportunity. Because marketplaces tend to shift more during tough times than in booms, companies should be willing to make bold moves and invest in new technologies that will support those moves and give them marketplace advantages.

Cisco's slower growth is related to several factors, some in the overall economy and some specific to the communications sector. General economic factors include higher energy costs and a slowdown in consumer spending, which is being reflected in some retrenchment in IT spending.

In the communications industry, the large carriers are experiencing their own hard times. The cost of establishing a cellular wireless infrastructure has left them burdened with huge debt at the same time that aggressive competition has rendered the long-distance business--historically the mainstay of several major players--marginally profitable. As a result, the carriers, which are a major market for Cisco, are cutting back on spending plans across the board.

Simultaneously, user organizations are rationalizing their spending on the Web, on networking and on IT in general. While they are not retreating everywhere, they are taking a hard look at their present infrastructure as well as their growth plans and cutting back where they can save money without putting major business initiatives at risk. For instance, many companies are looking for ways to consolidate Web pages, which directly affects Cisco's market.

Don't blame Juniper
Cisco's slowdown is not being driven primarily by increased competition. Juniper Networks, which is not experiencing any slowdown in its rapid growth, is succeeding because it has the fastest high-end router currently on the market. Carriers need these routers to handle the huge growth in traffic at major junctures in their networks. However, Juniper is still a small company compared to Cisco, and the high-end router market is only a small percentage of the total router market. For Cisco, the battle at the high end is more for bragging rights than for overall growth, though it does need to introduce faster technology to compete at the high end.

Indeed, the economic slowdown may be harder on some of Cisco's competitors than on Cisco itself. Cisco can count on brand recognition and its general dominance in the router market to carry it through. Most of its competitors cannot.

In the long term, the key question is what will drive router industry growth over the next few years, now that most companies have set up their Web infrastructures? Many observers in recent years have been predicting a convergence of voice and data networks. It is certainly technically feasible to implement voice over IP, and some companies have experimented with it.

But why would you want to run 8,000 simultaneous calls over an IP network? The major carriers are showing no signs of putting significant portions of their voice traffic over IP, and most users wonder why they would need VoIP. We remain skeptical about the imminence of voice-data convergence.

Although Cisco did disappoint Wall Street, both its actual quarterly growth and its projected growth for fiscal year 2001 (40 percent) would be very impressive in most industries. This is not an indication of some major financial disaster, even with the general economic slowdown. After abnormal double-digit and triple-digit growth rates in the IT industry in the last four years, an expansion for which Cisco's growth helped set the pace, companies like Cisco are inevitably coming back to earth and following the pattern of leading firms in other industries.

A time of opportunity
User IT organizations should view this period of slower economic growth as a time of opportunity. First, they can rationalize IT infrastructure, eliminate bottlenecks and unneeded redundancies, and identify infrastructure areas that need replacement. IT groups can also use this time to examine their processes and drive excellence into their operations.

Second, they can sharpen their focus on planning. In addition to purchasing and installing services and equipment, IT executives need to plan for the optimal infrastructure to support their business. Yet 90 percent of our conversations with clients seem to start with the question, "What do you think of this vendor?" or "Who is the market leader in this area?" More conversations should start "Why do we need this stuff?"

Third, they can examine procurement practices in general and negotiate better contracts with vendors. While the growth of equipment sales may be slowing, the pace of technology advancement in networking is not. If Cisco has extra inventory, it will be eager to move it before it becomes obsolete. Vendors will be much more aggressive in their marketing, which means they will be amenable to cutting favorable deals for upgrades and new sales.

In sum, although news headlines such as those about Cisco's earnings shortfall underline the overall slowdown in growth, we believe this is a time for retrenchment, not retreat. IT groups should look for ways that new technologies such as wireless can work to their advantage. Senior management should be open to investing heavily in those technologies and adopting aggressive strategies to improve the position of their corporations.

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