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Optical/IP

Chambers: Cisco's Ready to Brawl

As clouds loom over the economy and the service provider market, Cisco Systems Inc.'s (Nasdaq: CSCO) CEO John Chambers tried to paint a sunny picture in an important public speech today (see Chambers of Hope).

Chambers, speaking at an investment conference, said Cisco stands to gain more market share during tough times than during boom times. He sees Cisco’s product balance, its geographic balance, and its relationship with its large enterprise customer base as the keys to its ongoing stability.

But it wasn't all cheery chatter. Chambers was at times feisty, vowing that Cisco would compete more aggressively on the market performance of its high-end routers, where Juniper Networks Inc. (Nasdaq: JNPR) and Avici Systems Inc. (Nasdaq: AVCI; Frankfurt: BVC7) are currently besting it (see AT&T Deal Boosts Avici).

“We have got to compete on feeds and speeds,” Chambers said. “You will see us be more direct with regard to understanding and challenging our competitors’ claims. Some of the claims aren’t nearly as effective as some people would anticipate them to be.

“Juniper’s a very good company, and they’re fun to compete against.” Chambers added, though, that Cisco would be more aggressive about comparing Juniper’s marketing claims to results. “We’re going to be the clear leaders in high-end routing."

Chambers also wondered why other network equipment companies — such as Lucent Technologies Inc. (NYSE: LU) and Nortel Networks Corp. (NYSE/Toronto: NT) — aren't making headway in the high-end routing space.

In optical networking, Chambers said he would be “very disappointed” if Cisco didn’t hit his goal of $3 billion to $7 billion in revenue by the end of 2001.

Chambers told investors to watch deals in which Cisco sells end-to-end optical portfolios, for an indicator of its optical success. However, he added an important caveat: “You want to watch which ones we win that are profitable,” he says. “We are not going into situations where there is too low a margin with too high a risk.”

Chambers reiterated that, although Cisco’s vendor financing deals have been conservative when compared to its competitors, it would be even more conservative in that area in the coming months, focusing on profitability. But he maintained that, even with a lower stock price, Cisco is still on track to acquire 20 or more firms this year.

Also, Chambers dismissed claims that a slowing economy would cause staffing concerns for Cisco. On the contrary, he said, economic transitions make it easier to retain staff and make acquisitions. “Will Cisco be affected by a slowdown in carrier spending? Absolutely. We are not immune, but we won’t be as affected as certain segments of the IT community."

He also noted that, as a rapidly growing company, Cisco is bound to have a set amount of turnover within its management ranks. “I will either lose or change 10 percent of my leadership team every year. We anticipate that coming: It's just a natural phenomenon."

Chambers told investors to expect Wall Street earnings estimates on Cisco to vary more widely than before (see CIBC Downgrades Cisco, Juniper). “If we can say what the capital spending will be and what the economy will do in the short term, than we can predict the quarters very accurately. Lately, though, our visibility has been a bit tougher, and therefore I would expect a wider range of estimates."

All in all, Chambers won the crowd with his candor and his sunny disposition.

Apparently, however, the speech was not sunny enough to reassure Cisco's nervous investors. Cisco's stock rose briefly leading up to Chambers's speech, but slid back afterwards. In late afternoon trading, Cisco was down 2.69 (7.24%) to 34.44.

-- Phil Harvey, senior editor, Light Reading http://www.lightreading.com
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Scott Raynovich 12/4/2012 | 9:02:25 PM
re: Chambers: Cisco's Ready to Brawl What do you think 2001 holds for Cisco?
Skiier_Dude 12/4/2012 | 9:02:22 PM
re: Chambers: Cisco's Ready to Brawl 2001 should be an interesting year for Cisco. Not surprizingly, much of the shine has become tarnished, and they need to work to resolve an image which is starting to look to their customer's as arrogant. They are in a transition period now from capitalizing on a market where rapid rapid growth was the norm, to a more commodity based market where pricing, availability and customer service are somewhat more important than features and functionality.

I expect that you will see Cisco miss a quarter or two this year through a combined slow down in sales growth, coupled with an expanding expense line.

Cisco is now facing stiff competition in core routing (Juniper, Alcatel), Optical (Nortel, Sycamore, Alcatel), voice access, B-RAS, and are rapidly losing ground in the SME marketplace. They've missed the boat in DSL, a market pretty well owned by Alcatel and as such are beginning to lose ground in the large carrier market space. I'm not predicting hard times for Cisco, but I no longer look at Cisco having a lead over the rest of the main contenders in the pack.
pablo 12/4/2012 | 9:02:20 PM
re: Chambers: Cisco's Ready to Brawl
It is not like Cisco has fallen prey to business-know-how amnesia over night. I don't think there is another company out there that can rival Cisco's positioning, with utter focus on the core technologies of the emerging Optical Internet infrastructure. And no, I don't work for Cisco. :-)

The current climate is hard on anybody, but I do think that the smaller you are the more exposed you are, which means that possibly service providers will increasingly shy away from opting for start-up technology for key components in their network. More than ever, they'll feel safe opting for the large supplier, the one that offers the guarantee of continuity *and* delivers on the technology they need, and Cisco combines safe size, a product portfolio that ranks reasonably high when it comes to technology benchmarks and for a company its size its suprisingly nimble.

But they do have to consolidate their acquisitions some and create far more inner synergies and allow for cross-polination between the different technolgies and product lines.

I don't know why one would think Cisco will be less of a formidable force. The current market will cause financial hick-ups left and right, but Cisco can absorb those, and probably even profit from the current situation to emerge stronger when things settle some. Will the share price hit $80 again anytime soon? I don't expect it, but then that is not really the benchmark for market dominance.

Cisco's key competitors continue to be Nortel and Lucent going further, and I think those two face far more formidable issues. And Juniper? Awesome thus far. But with size and a critical mass of large service provider customers start the headaches that in the end start the issues that, for instance, Cisco's GSR12000 is facing. And the latter still owns a cool what, 70-something % of the market? I am sure several companies would love to have such "problems". I know I would. :-) Juniper's dependency on one product line will sooner or later accentuate their growing pains, it always invariably happens, and will not mean Juniper is less of an IP backbone powerhouse.

Yes, the market sucks right now. Yes, all the players hurt. But looking at the playing field, I think Cisco is still the most likely to clench teeth and knock the ball off the park in the end.
cisco_undervalued 12/4/2012 | 9:02:19 PM
re: Chambers: Cisco's Ready to Brawl Sorry to point out that Skiier Dude's opinion is not fully correct. Cisco has always put customers first, this shows in the increasing customer satisfaction numbers. Cisco has been very conservative in guiding analysts, as you can see from the past performance - quarter over quarter of consistent meet-or-beat expectations by a penny or two at most - hence missing of a quarter would be a remote possibility!

If you go through summaries of today's conference, Chambers mentions that he is going to cut down expenses by "watching hiring process" for some days to come, and by other means, thereby maintaining gross margins. Can you really categorize cisco, who consistently makes 60% plus gross-margins, as a commodity business? In my opinion, commodity businesses are the ones who perhaps make 10-15% gross margins!!

In terms of competition, as Chambers mentions, the competitors appear to skew the market-share information, which he vows to defend in the near future with more PR.

Cisco is the leading provider of VoIP to Enterprise. As Chambers mentions in his speech, cisco is staying away from low margin high risk areas, probably consumer DSL is one of them, as you can see from the market reaction to DSL providers. As cisco's strategy man Mike Volpi pointed out during a previous analyst call, product cycles of companies are skewed in time. Today juniper maybe having a competing product, tomorrow cisco will have a much better product and this goes on... Hence, it is not fair to evaluate a company based on snapshots in time, but it should be based on a long term outlook.
My main aim with this post was to point out some points which Mr Skiier_Dude missed while skiing past cisco (no pun intended!), many of those points were mentioned in the related article itself!! My personal rating of csco - strong buy long term. I hope Skiier would take this reply with a positive attitude :-)

Personal Disclaimer: This post has been written based on information available to the public and represents only the personal view of the contributor. This post, by no means, is a solicitation to buy or sell the stocks mentioned in this post. The contributor may have positions in one or more of the securities mentioned in the posting.
lu_csco_nt 12/4/2012 | 9:02:10 PM
re: Chambers: Cisco's Ready to Brawl they're fucking tight man...i say the hell with skiier dude...he probably works for nortel or lucent
Telecom_Guy 12/4/2012 | 9:02:09 PM
re: Chambers: Cisco's Ready to Brawl He has to be if he thinks that the stiff competition for Cisco in the routing and optical business is coming from Alcatel. ha ha ha.
They own the DSL? ha ha to that too!!!
Who's deploying that right now and making money? Look at Paradyne, Copper Mountain, Lucent, Rhythms, NorthPoint. That DSL didn't do so great for them huh. Competition for Cisco in the Routing and Optical domain will come from companies such as Avici, Juniper, Sycamore and Ciena.
reoptic 12/4/2012 | 9:02:07 PM
re: Chambers: Cisco's Ready to Brawl That Chambers guy is some smooth talker. Guy looses 30% share in his core growth market in a year to JNPR and says he 'loves to compete'. Then deflects attention onto LU and NT problems. Signals his growth is slowing. And the analysts eat it up and the stock is going up! Wow!
multimed 12/4/2012 | 9:02:05 PM
re: Chambers: Cisco's Ready to Brawl Naysayers beware. In this volatile market, Cisco is an easy target. Everyone's taking a beating and its shocking to some that Cisco is not bulletproof. But those quick to dismiss the future potential of Cisco fail to remember that this giant was created in someone's living room just over a decade ago. Cisco didn't just pop up. It's not a traditional start-up nor a fly by night. This is a company that has shown time and again that its earning potential is incredible. This time is ultimately good for Cisco. Rather than being on the constant push for production, the focus can skew more towards R&D. That means new markets, improved existing markets, and the Cisco name on more items that you could expect. Juniper is amazing, but will their single line idea hold up in the face of a more encompassing competitor?
madhatter 12/4/2012 | 9:02:00 PM
re: Chambers: Cisco's Ready to Brawl Not sure where you get your info on Alcatel. Not picking on ya but... Cisco is the top dog in DSL. More ports than anyone. Then also add in the Next Gen DSLAMS (extremely feature rich) and they also have market share there. Competition is great but you need to support it with whats out there. Alcatel, Paradyne and Copper Mountain were early players, Alcatel is still a good one and there also is Redback.

You also cant judge DSL completely on CPE either. Theres the DSLAM and Aggregation to count. All part of the big picutre.

Out of curiosity, how do you say they missed the boat? How does Alcatel kick over the Cisco Slam?

Talk to you soon
pablo 12/4/2012 | 9:01:58 PM
re: Chambers: Cisco's Ready to Brawl
> ... Guy looses 30% share in his core growth
> market in a year to JNPR ...

No analyst substantiates 30% within 12 months. Nor is the Internet core Cisco's core growth market. Edge to core revenues will always stack up about 4:1, which is why so many in networking believe in the good old "doughnut" theory. The core is the macho stuff, but the edge is where you truly make most of the money. And we're not talking access CPE.

Which is not to say Juniper's achievement isn't noteworthy. But fact is Cisco still own over 70% of the core market with the 12000, a position of dominace no one in any other industry would see as a "problem". Of course that opens the door to people that offer a slightly different positioned product that is a better fit for some applications. Cisco will be in trouble if the roles invert within a year, and Juniper owns 60% of the core biz... which won't happen.

And as Juniper grows, the support for their installed base will slow their innovation just as much as it did with Cisco's 12000, which in turn will open the window of opportunity for others. How long is Juniper's M-series truly continue to be a "core" product? They don't have a Terabit switching story, for one. Which on the other hand maybe indicates that the significance of Terabit switching is over-rated? Who knows...

> ... And the analysts eat it up and the stock is > going up! Wow!

They didn't eat it up as much as they used to, though. I listened to the conference, and Chambers sounded uncharacteristically strained. Still silky smooth, but talking faster and more than he usually does, trying to muscle his audience more than usual. It was a tough assignment, though, I don't even want to imagine how much it'd cramp *my* style to know several billion in validation were at stake based on how my speech came across...
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