Networking Market Confounded, But Future Less Bewildering
By MARK BOSLET
Dow Jones News Services
PALO ALTO, Calif. -- A confluence of factors is producing a modest sales slowdown in the computer networking industry, but under the surface the currents of growth remain strong.
So say many experts as they focus on two months of worry that have roiled stocks once thought to be largely immune to the cyclical, and other financial, pressures flowing through other industries.
Slower governmental spending in Japan, weak economies in Germany, France and Italy, uncertainty about global telecommunication deregulation, and the anticipation of new products have conspired to create more difficult market conditions than normal in the fast-growing industry. Add to that increased competition in many segments of the market and investors face a formula for stock volatility.
However, the need to increase bandwidth - the size of the transmission pipes in network plumbing - remains strong in the U.S. and abroad, where adoption rates have lagged those in North America. Underpinning growth in the industry as well are the continued rise in corporate information technology budgets and the tying of more computers to networks and more subscribers to the Internet.
''People are concerned there is a fundamental slowdown in demand,'' said Therese M. Murphy, an analyst at Smith Barney Inc. ''That is the question. (But) I do not think there is a fundamental change in demand.''
Still reasonable is industry annual sales growth of 30% to 50%, said Murphy, referring to a market projection commonly endorsed by industry leader Cisco Systems Inc. (CSCO).
Trends such as telecommuting are building steam at the same time as computers are sending larger and larger data files, increasing the need for transmission capacity.
For many networking products, there is pent-up demand, insists Nicholas J. Lippis III, president of Strategic Networks Consulting of Rockland, Mass., a network consultant to corporations.
Information technology budgets have risen 5% to 10% on average in the U.S. this year - the same pace of recent years - and network traffic on corporate intranets has multiplied by as much as 100 times, he said. Meanwhile, the number of desktop computers that need to be connected to networks is growing by 30% to 50% annually, Lippis said.
But all this runs in the face of the unsettling news that began coming out of companies in early January. For instance, Shiva Corp. (SHVA) shares plunged 44.8% in a single trading session after the company signaled that fourth-quarter earnings would be well below Wall Street's expectations. The company cited the loss of a $5 million order from International Business Machines Corp. (IBM).
On Jan. 23, Shiva reported fourth-quarter net of 5 cents a share, short of the original expectation of 21 cents as well as the year-earlier result of 15 cents.
Cascade Communications Corp. (CSCC) shook up the market sector at about the same time when it released fourth-quarter results with revenue from its core frame-relay products largely flat with the third quarter.
The carnage spread to other networking industry notables such as Fore Systems Inc. (FORE), which investors sold wildly earlier this month, worried about the company's Japanese business, and 3Com Corp. (COMS), which in February warned that quarterly profits would be lower than expected. Intel Corp. (INTC) lowered prices on its fast Ethernet network cards, which enable computers to link to Ethernet networks at high speeds, and 3Com followed suit by cutting its own prices on this important product line.
The worries spilled over to Cisco, which has seen its stock price fall 36% since mid-January amid a broad selloff in technology shares. Because Cisco represents such a large slice of the industry, observers view it somewhat separately.
And they say it has now reached a size that for the first time makes it more vulnerable to the weaker economies and government spending in places such as Japan and Germany.
The company also appears to have experienced some pause in buying as corporate customers evaluate new technologies coming to the market, said Richard H. Kimball of Technology Crossover Ventures, a Palo Alto, Calif., venture capital fund.
Router sales may have slowed slightly as customers wait for a new higher performance router that Cisco calls its Big Fast Router, agreed Noel Lindsay, an analyst at Deutsche Morgan Grenfell. The product is expected this year, perhaps as early as summer.
The development of IP, or Internet protocol, switching, high-speed gigabit Ethernet, and devices that combine switching and routing has put pressure on Cisco to present an alternative. These machines - which direct traffic within networks - are viewed as capable of replacing traditional routers in network cores, or backbones, and have drawn the attention of customers such as Internet service providers, who are among those reining back slightly on their buying.
The Big Fast Router is one alternative, and Cisco has recently briefed some key customers on the product, which it otherwise has kept largely under wraps. Cisco also has a gigabit Ethernet product under development.
''We think Cisco probably will make the quarter,'' Lindsay said, referring to Wall Street targets for its current fiscal third quarter. ''But there is a chance they could miss, and that is pretty unusual for Cisco.''
First Call Inc. cites a consensus analyst estimate of 53 cents a share. In the year-ago period, Cisco earned 39 cents.
Caution, however, is not universal among Cisco analysts. Smith Barney's Murphy said she is optimistic after talking to numerous Cisco customers that TAG switching will be widely adopted and become an industry standard. TAG switching, a technique that labels computer messages to more efficiently send them across a network, is another Cisco answer to IP switching.
As is evident, finding a single answer to the sector's doldrums is difficult in an industry with such rapidly changing technology.
''It's a little here, a little there, and it's affecting each company differently,'' said Morgan Stanley & Co. analyst George J. Kelly. But the ''wheels are not falling off this industry,'' he said.
For example, Cascade experienced some pause in its frame-relay growth, but this coincided with a major transition at the company, the expansion from a single product line to several, including asynchronous transfer mode, or ATM, IP switching and remote access.
Likewise, Shiva, which once owned the remote access market, has seen the advent of competition from companies such as Cisco, 3Com, Ascend Communications Inc. (ASND) and U.S. Robotics Corp. (USRX), which 3Com intends to buy.
Various market segments also have shown some maturity. Shared hub sales in 1996 were $4.7 billion, largely unchanged from 1995, according to figures released last month by the Dell'Oro Group, a Portola Valley, Calif., market research firm.
Even routers are seeing some slackening in their strong growth. In 1996, router sales were up 57% to $4.6 billion, but the gain this year should be 41%, the Dell'Oro Group said.
Also, many analysts said that while switches for the local area market should continue to grow by leaps and bounds the rate may be under last year's 200% pace.
The industry's current woes, however, have done little to dissuade participants. The prospects in the industry remain good, said Gary Daichendt, Cisco's senior vice president of worldwide operations. ''I think the fundamentals of the industry are still there.'' |
