Outlook 2001: Bandwidth Demand
Could Spare Networkers Woe
(12/28/00, 8:05 a.m. ET) By By Meg Walker, TechWeb News
As the New Year approaches, doubts have surfaced
about the fortunes of networking vendors who have
built the foundation for the information superhighway.
While networking powers like Cisco Systems Inc.
(stock: CSCO) will not likely feel the effects of a
slowing economy as acutely as dot-com e-commerce
companies, analysts worry that reduced spending on
corporate IT and capital spending from the
telecommunications providers will take its toll on the
smaller fry.
Shares of Cisco -- a long-time Wall Street darling --
tumbled recently after Michael Ching, a Merrill Lynch
analyst, downgraded the stock on Dec. 20 from "buy"
to "accumulate."
Ching said he lowered the stock's rating because a
Merrill Lynch survey suggested there could be
downward pressure on the prices of data networking
equipment.
Reduced IT spending could also affect the enterprise,
small, and medium, business market, which make up
about 65 percent of Cisco's revenues, he said.
But other analysts and company representatives say that
though there may be some turbulence among the service
providers who number among the top buyers of
networking gear, Cisco and the like will end up thriving
in 2001 because of insatiable demand for high-speed
Internet.
"We'll see a continuation of interest in broadband and
the access network," said Bruce Wootton, vice
president of communications services and technologies
for The Hurwitz Group, a consultancy in Framingham,
Mass.
"Because of the demand, the business issues here will
ultimately be resolved," Wootton continued.
"Broadband access has only penetrated 10 percent of
the market, and ultimately a significant number of
people want that high speed access -- and that means
upgrades."
Cisco CEO John Chambers is very optimistic about
that company's prospects. He told analysts in early
December that despite a declining stock price, Cisco
would maintain aggressive annual growth of between 50
and 60 percent.
Cisco, San Jose, Calif., could keep on course by
introducing more products aimed at stimulating Internet
use, and by continuing to invest in or buy smaller
companies, he said.
Other Cisco execs echo the theme.
"Our projection for the New Year is that the enterprise
business will continue to show strength, and the
networks will continue to have value," said Peter
Alexander, Cisco's vice president of enterprise
marketing.
Companies can't afford not to upgrade networks in an
economic downturn because the better their e-business
services are, the better their productivity and customer
support will be, Alexander said.
He sees demand for services in IP telephony products;
content networking; virtual private networks; and
wireless LANs.
Analysts said the optical networking market will
continue to heat up in 2001 and forecast a battle among
Cisco, Nortel Networks Corp. (stock: NT), as well as
Ciena Corp. (stock: CIEN) and Yipes Inc. in San
Francisco.
"It'll be optical networking next year, in particular the
use of optical switches in the core of the network,
which will push routers out close to the edge," said
David Passmore, research director for the Burton
Group, a Salt Lake City researcher.
"There's a huge amount of data to transport and carry,
and optics is the only way you can do it," said Stephane
Teral, director of European optical transports for RHK,
telecommunication analysts in San Francisco.
Cisco has just begun to enter the optical market with its
purchases of transport companies Cerent Corp.,
Petaluma, Calif., and Monterey Networks, Richardson,
Tex.
Teral said that though Nortel, Bramption, Ontario, has
been the king of optical networking, the company must
take action in 2001 to keep that spot, either by
acquiring small companies or advancing its own
home-grown technology aggressively.
"When you're No. 1 it's good, but it's also bad because
you have to figure out how to stay there," he said.
Jeff Matthews, a general partner in RAM Partners, a
hedge fund in Greenwich, Conn., said that even the big
networking vendors will have to scale back spending
because of the slower economy.
He cites Foundry Networks Inc. (stock: FDRY) as a
cautionary tale. Shares of the San Jose, Calif., maker of
switches and routers fell 50 percent after it warned its
revenue growth has been hurt by spending slowdowns
at Internet service providers.
Merrill Lynch's Ching wrote in a report that Foundry's
announcement was the first sign that cutbacks in capital
spending could hurt suppliers of next-generation
switching solutions.
These vendors, often termed as infrastructure players,
have so far been largely insulated from the fallout of
devastated dot-com companies and other once
high-flying sectors.
"Cisco is the best house in a bad neighborhood, and I
have no doubt they will outgrow the market," Matthews
said. "But when a high flier like Foundry announces
problems, I can assure you that Cisco's customers are
feeling the same heat."
Matthews has other cases to prove his less-than-rosy
forecast.
Second-quarter revenue for 3Com Corp. (stock:
COMS), the networking hardware maker in Santa
Clara, Calif., slipped 5 percent because of troubles in
the telecommunications industry.
Sales of networking equipment to telecommunications
companies alone fell 43 percent in the quarter ending
Dec. 1. The company hopes to shore up declining
business by creating a new division -- CommWorks
Corp.-- that will cater solely to network service
providers.
"We've been very careful where we extend credit," said
Bruce Calflin, 3Com's incoming CEO. "We've
concentrated on the larger players and we don't think
they are credit risks, but where it does affect us is in
orders that slow down. You don't ship as much
product, you don't get as much revenue."
Still, Claflin is confident about the future.
"Customers for years have enjoyed the benefits of
networking, but you had to go there, and people now
want to be connected to the networks wherever they
are," he said. "We think there's an explosion in wireless
demand that we can capitalize on in the next year." |
