But five analysts interviewed for this story say that a large
portion of Cisco's sales to carriers and ISPs -- perhaps as
much as half -- actually aren't used by carriers and ISPs.
Rather, the carriers and ISPs send them along to the same
corporations that have relied on Cisco for years.
By Kevin Petrie
Staff Reporter
9/24/99 7:00 AM ET
Cisco (CSCO:Nasdaq) says it's pulling in customers by the
boatload in a new key market, but some observers say the
company is telling fish stories.
The San Jose, Calif.-based networker says sales to phone
carriers and Internet service providers increased to roughly
$1.1 billion in the fiscal fourth quarter ended July 31, up a
stunning 80% from the year-earlier quarter. Hot growth. And
revenue from these companies now totals a fat 30% of
business, Cisco brags.
But five analysts interviewed for this story say that a large
portion of Cisco's sales to carriers and ISPs -- perhaps as
much as half -- actually aren't used by carriers and ISPs.
Rather, the carriers and ISPs send them along to the same
corporations that have relied on Cisco for years.
Cisco doesn't dispute the fact that some of the products it
ships to carriers and ISPs end up elsewhere, but it says it
can't keep track of each product's final home. And some
investors don't care -- after all, a sale is a sale. But by
tossing out the $1.1 billion figure without specifying its
breakdown, Cisco can create an impression that its sales in
this new market are bigger and growing faster than they
actually are. And that raises questions about the company's
true growth in the market, which is central to its future
growth.
Cisco remains "something of a niche provider" to carriers
and ISPs, says Paul Sagawa, an analyst with Sanford C.
Bernstein, which hasn't participated in any recent Cisco
underwriting. (Sagawa rates Cisco a buy, largely because of
its strong brand name with Fortune 500 companies.)
Cisco has long produced stellar revenue growth by furnishing
large companies such as Kaiser Permanente with routers
and switches that send data signals over computer
networks. In the July quarter alone, revenue jumped 48% to
$3.5 billion.
But the fast-growth market is shifting to carriers and ISPs,
which want data-networking equipment. Cisco is tackling
this market and trying to compete with Lucent (LU:NYSE)
and Nortel (NT:NYSE), both established suppliers to
carriers and ISPs that are trying to branch into data
networks.
And Cisco has made progress -- but perhaps not as much
as it contends.
Cut Cisco's reported sales to carriers and ISPs in half, says
Sagawa, and you have a more accurate picture of its
business in that segment. Sagawa counted estimated sales
of particular products, relying on market researchers such as
Dell'Oro Group and Cahners In-Stat, and surmised where
each product ended up. By Sagawa's count, in the most
recent quarter, carriers and ISPs only bought about $530
million worth of Cisco equipment for their own use.
Martin Pyykkonen, an analyst with CIBC World Markets,
puts the figure at about $730 million. (CIBC hasn't performed
recent underwriting for Cisco.) Another industry analyst, who
asked not to be named, agrees with the roughly $730 million
figure.
"I have no idea how any analyst with any authority can make
such an assertion," says a Cisco spokesman. Cisco, he
says, can't possibly track its product sales with enough
precision to break down the $1.1 billion in products in this
group. Moreover, even if corporations end up with the
equipment, it just means that carriers and ISPs have
"become, in one sense, a gigantic sales channel for Cisco,"
he says. "Consulting" by carriers and ISPs represents a
"substantial business" for Cisco that's growing more than
50% annually, he adds.
Here's how some of those arrangements work: A carrier
such as AT&T (T:NYSE) buys a batch of Cisco equipment,
then installs it in a corporate customer's offices and charges
the customer a monthly service fee. For Cisco, that means
it's still effectively supplying its same old corporate
customers.
Some analysts disagree, saying Cisco is scoring in this
market. Jeremy Duke, president of the research firm
Synergy Research Group, estimates that nearly all of
Cisco's reported $1.1 billion in revenue represents straight
sales to carriers and ISPs. Duke's firm sells its research to
Cisco and Lucent.
But another communications supplier is able to be more
straightforward in its reporting. In the June 30 quarter, for
example, Lucent reported it had $6.1 billion in sales to
carriers and ISPs, up 27% from the prior year, strictly by
counting products that were used by carriers and ISPs,
according to a Lucent spokesman. Anything that was used
by a corporation was counted in the corporate business unit,
which achieved $2.1 billion in sales, up 4% from one year
earlier. Lucent is better able to track products because it
relies more on direct sales than Cisco.
Ned Brines, vice president with Roger Engemann &
Associates, has long invested in Cisco because of its
powerful brand name with corporations. But even he wants
Cisco to be more frank with Wall Street.
"It's always been a struggle to get more detailed information
from them," says Brines. Soon Cisco might not have a
choice, thanks to a new rule from the Financial
Accounting Standards Board. FASB 131, as it's called,
requires companies to break out results for each business
segment. To matter, a business unit generally must
constitute more than 10% of revenue, assets or profit.
Cisco declined to comment on the impact of FASB 131 on
its reporting, and it's possible that Cisco's business units
have so much overlap that the rule wouldn't change their
reporting. Still, the rule also requires that, to some degree, a
company's public reports should reflect its internal reporting.
So if Cisco executives have more data, they might have to
expose more information.
"I think they'll have to provide more information," says Brines
-- and soon. Cisco is expected to shortly file its annual 10-K
document for the fiscal year ended July 31.
Meanwhile, Cisco will keep spinning its image as the new
best friend of carriers and ISPs. "Every company tries to
paint itself as something it's not," says Sagawa at Sanford
C. Bernstein. "Cisco's just been more successful at it."
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