Cisco: Sailing Into Stormy Waters?
If Cisco Systems Inc. (Nasdaq: CSCO) achieves its goal of becoming one of the big players in the telecom market, some of its shareholders may be in for quite a shock. The company’s long record of steadily increasing revenues could come to an end. Big variations from one quarter to the next could become the order of the day.
That’s the conclusion that comes out of a comparison of revenues of Cisco and one of its main rivals, Nortel Networks Corp. (NYSE/Toronto: NT) over the past four years, prepared by Dell'Oro Group, a market research company that specializes in crunching sales numbers.
Dell’Oro’s analysis of Cisco’s revenues, broken into product categories, shows a nice, smooth, steeply sloping curve with no nasty surprises:
The comparable picture for Nortel paints a very different picture, with bumper quarters often being followed by big downturns:
The reason for the dramatic difference? Cisco primarily sells to enterprise customers and Nortel to telecom service providers, according to Greg Collins, a director at Dell'Oro Group.
While enterprise customers pretty much provide steady business year round, the bulk of Nortel's customer base spends heaviest during the second and, especially, the fourth calendar quarter of each year, says Collins.
The cyclical nature of telecom service provider spending recalls the old Bell System companies that used to wait until the fourth quarter to buy software upgrades for switches, causing a revenue and earnings spike for equipment vendors, says A.G. Edwards analyst David Heger.
That cyclical pattern may be changing in the next few years, as emerging service providers establish spending patterns that reflect a constant demand for bandwidth. Right now, however, incumbents still represent a large proportion of the equipment market (see U.S. Carriers to Spend $88B in 2000).
Either way, analysts that follow Nortel and its rivals are accustomed to considering the peaks and valleys brought about by seasonal spending patterns. Despite the jagged charts, the most telling numbers are year-over-year comparisons between like quarters, says Heger. So long as those numbers keep going up, there's little to be alarmed about.
The smooth ramp on Cisco's chart does speak volumes for how successful the company has become at moving into new markets, Collins says. He points out that Cisco did a good job of developing its switching business, as its legacy router business leveled off.
The big question now is whether Cisco can repeat its success when moving into a totally different sphere.
-- Phil Harvey, senior editor, and Peter Heywood, international editor, Light Reading http://www.lightreading.com