Cisco Beats Street, Cries 'Optical'

Cisco Systems Inc. (Nasdaq: CSCO) beat investor expectations once again, as it announced results for its fourth-quarter fiscal 2000 earnings Tuesday.

Among the quarter's highlights, Cisco reported $1 billion in bookings for optical gear, up from practically zero a year ago. And while steady growth was seen throughout all lines of business and throughout all geographic regions, sales in the service provider market increased 20 percent from the previous quarter and nearly 100 percent from the previous year, said company officials.

In after-hours trading on the Island ECN late Tuesday night, Cisco shares were up nearly $2.50 at $67.99 after closing Tuesday at $65.50.

The company said that for the period ended July 29, its profit rose 69 percent to $1.2 billion, or 16 cents a share, compared with $710 million, or 10 cents, a year ago. Sales rose 61 percent to $5.72 billion from $3.56 billion. These results topped the consensus forecast of 15 cents a share, according to First Call/Thomson Financial.

Company officials touted the optical market as one of the hottest areas of growth for the company. The company is building an optical portfolio with products from acquisitions that have included Cerent Corp., Monterey Networks, Pirelli Optical Systems, and Qeyton Systems Inc., said Kevin Kennedy, VP of Cisco’s service provider line of business, on Tuesday's analyst conference call.

“One year ago we had no optical business whatsoever,” he said. “The momentum is significant.”

Although Cisco claims that it has all of the relevant optical pieces to the network puzzle, all of its products aren’t yet shipping. Cerent still makes up the bulk of bookings in the fourth quarter, with a small portion coming from the Pirelli DWDM equipment. And a year after it bought vendor Monterey Networks for $500 million, the company has yet to see any revenue from the acquisition (see Cisco's Russo: We're Just Getting Started).

Company officials said they expect service provider trials of the Monterey product to wrap up this quarter, with products shipping by the end of the first quarter for fiscal 2001. Cisco Chairman and CEO John Chambers said he had hoped to be shipping a quarter earlier, but difficulty in getting components played a major factor in the delay.

Chambers also emphasized the fact that Cisco is the only vendor to currently provide a suite of optical products and a high-speed IP routing solution. But Cisco won’t be the only vendor with such breadth for very long. Lucent Technologies Inc. (NYSE: LU) has already begun selling the terabit router that came out of the Nexabit Networks acquisition last summer (see Lucent Quiets Terabit Router Rumors). Alcatel SA (NYSE: ALA), another heavy hitter in the optical space, also claims to have a terabit router in the works (see Alcatel Boxes Clever ). Nortel Networks Corp. (NYSE/TSE: NT), the market leader in optical networking, was supposed to be shipping its version of a terabit router by this summer, but after delays the company instead entered into a reseller agreement with Juniper Networks Inc. (Nasdaq: JNPR), the only major challenger to Cisco’s IP core domination (see Nortel and Juniper Join Forces).

Indeed, not all is perfect in Cisco's world. There are signs the company might be losing marketshare in the IP router market. Even with 100 new Gigabit Switch/Router (GSR) customers this quarter, bookings only grew 10 percent, as opposed to the 60 percent seen the previous quarter, said Chambers. In the same breath, Chambers tried to dampen concerns about Cisco’s market position in IP routing. “It’s a lumpy market, and fluctuations are based on large orders from quarter to quarter,” said Chambers.

Demand for OC192 interfaces in IP routers is clearly growing, as demonstrated by Juniper’s latest deal with Metromedia Fiber Network Inc. (Nasdaq:MFNX), which bought 170 routers specifically for those interfaces (see Speed Key in Juniper's MFN Deal ).

One of Cisco’s biggest concerns is the shortage of components, particularly for its optical business. Kennedy says that shortages slowed down deployments this quarter, but he and Chambers emphasized the fact that the company is working closely with partners to keep up with demand. Currently, Cisco is one of the only big companies without its own component division. Alcatel, Nortel, and Lucent all have divisions that provide parts for their optical system products.

Another highlight of the call was the announcement that Don Listwin, the number two executive at the company, was leaving to become CEO of a startup.

-- Marguerite Reardon, senior editor, Light Reading, http://www.lightreading.com

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