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Network strife: Is Cisco next?

As more network equipment makers reveal that earnings will be even more dour than thought, analysts wonder what the future holds for industry bellwether Cisco Systems.

    As more network equipment makers reveal that earnings for the short term will be even more dour than thought, analysts wonder what the future holds for industry bellwether Cisco Systems.

    A slowdown in spending from telecommunications service carriers has hit the network equipment makers hard. Nortel Networks and ADC Telecommunications are the latest to issue earnings warnings that rocked the whole equipment sector.

    Based on Cisco's stock movement, Wall Street believes the company may be the next to issue bad news. Cisco closed down $2.38, or 13 percent, at $15.75 Wednesday on a volume of about 185 million shares, more than three times the stock's average daily volume of 53.6 million shares.

    The stock traded as low as $15.38, a new 52-week low, compared with the stock's high of $82.

    "The sudden lack of capital has put the crimp on equipment suppliers," said William Becklean, an analyst at SunTrust Equitable Securities. "It makes it tough for Cisco because they are in every market and can't hide anywhere."

    Cisco Chief Executive John Chambers hinted last weekend in an interview in the Financial Times that the spending slowdown may last longer than originally expected, and he hinted that it could spread to Europe.

    Chambers told the Financial Times that he thought the slump could last at least three quarters. In February during an earnings conference call, he predicted the slowdown would last just two quarters and expressed confidence for a second half rebound.

    Wall Street believes a turnaround this year is becoming more unlikely.

    Becklean believes Cisco will get hammered from all sides during the slowdown because the company has extended itself to a broad number of markets. But he also thinks Cisco would rather weather the short-term turbulence than pull back.

    Many believe growth in the networking industry will remain strong, and Cisco could lose its dominant position faster if they decide to give it away and not compete in certain segments.

    "I look at it as a correction rather than a dismal slowdown," said Todd Hanson, an analyst at Dataquest who follows the recent telecommunications spending change.

    Phone service start-ups and dot-coms with venture capital cash drove spending on network equipment to great heights. The spending continued as long as the financial markets rewarded such largesse with high-flying IPOs, and Cisco reaped the rewards of the boom with higher sales.

    For fiscal year 2000 ending July 29, 2000, Cisco reported sales of $18.92 billion compared with last year's $12.17 billion.

    Once the stock market headed south, however, and the access to capital dried up, so did the VC-backed firms that stoked the spending growth.

    Established telecom companies also cut spending and began to rethink their growth priorities, which also dented the equipment makers' sales--a trend many believe will continue.

    "Cisco's clients will be thinking about cost-containment and curbing spending," Dataquest's Hanson said.

    The squeeze from established carriers and the disappearance of sales from new companies may combine to force Cisco to ask itself some tough questions.

    "There will certainly be business units that will do better and some that might fall by the wayside in the short term," Hanson said.

    "Any large organization is going to go through a period of scrutiny after its stock price has fallen...(especially) with the growth rate they're accustomed to."