Cisco Hits Potholes in Its Push Into the Phone Carrier Market
By Kevin Petrie
Staff Reporter
4/22/98 7:05 PM ET
Cisco's (CSCO:Nasdaq) campaign into the phone
carrier business looks like it's hitting
resistance.
AT&T (T:NYSE) Wednesday confirmed that a Cisco
switch played a part in a widespread network
outage last week. The company lauded Cisco for
helping fix the problem and stressed that the
dominant networker won't lose AT&T's business.
But a spate of recent events shows that even the
seemingly untouchable Cisco, which mainly supplies
computer networking equipment for companies, can
hit potholes, especially when it comes to serving
demanding carriers. Early this month, GTE
(GTE:NYSE), a Cisco stronghold, selected products
from Cisco rival Ascend (ASND:Nasdaq) for a new
data network. This week Qwest (QWST:Nasdaq) gave a
lucrative slice of its business to Ascend as well
as Cisco. Other recent Ascend contracts include
Williams (WMB:NYSE) and LCI (LCI:NYSE).
Cisco didn't return a phone call. Ascend's
treasurer, Bernie Schneider, said, "I would be
very surprised if we're not [gaining market
share], based on the wins we've gotten."
Still, it has long been a losing proposition to
bet against Cisco. This year alone the stock has
climbed 30% to record highs. Overall, Cisco is
waxing strong while rivals like 3Com (COMS:Nasdaq)
and Bay Networks (BAY:NYSE) are struggling. Big
shareholders say running a scorecard of recent
contracts shows little. And it's unclear whether
Ascend really is stealing market share or just
winning business in a growing market. But Cisco
trades at a steep 58 times trailing profits,
putting the stock on a precarious perch.
Carriers represent "one of the areas I would
definitely question the company on," says noted
analyst Bill Rabin at J. P. Morgan. Still, Rabin
remains a bull on the stock. His firm has not done
any recent underwriting projects for Cisco or
Ascend.
On Wednesday Cisco stock slipped 3/16 to 73 5/8,
while Ascend tacked on 5/16 to close at 43 11/16.
Cisco's market capitalization of $75.2 billion
easily tops Ascend's $8.3 billion value.
Cisco is expected to report earnings in early May
for its April quarter; a First Call consensus
predicts 44 cents per share.
Ascend is Cisco's only major rival that has looked
strong lately. On April 9, Ascend topped estimates
by a penny and reported first-quarter profits of
$52.4 million, or 26 cents per share, on revenue
of $305.1 million, compared with a net loss of
$163.2 million, or 88 cents a share, on revenue of
$292.7 million one year earlier. The company has
recovered from the fallout of a buggy software
product for Internet service providers last
summer.
The switches both companies sell use two
technologies, asynchronous transfer mode, or ATM,
and frame relay -- both of which enable carriers
to dislodge bottlenecks of data and multimedia
traffic deep within their networks.
Cisco and Ascend gained chips in this game through
acquisition. In July 1996, Cisco snapped up the
private ATM company StrataCom. About a year later
Ascend sealed its merger with Cascade, whose frame
relay and ATM wares are pulling the company's
wagon today. Cisco had its chance with Cascade --
in late 1993 the two paired to develop products.
Cisco has devoted big resources to unseating
Ascend and the Canadian networker Newbridge
Networks (NN:NYSE) from prized ATM accounts. It
did wrest a piece of US West's (USW:NYSE) business
from Newbridge in late January, but some pros say
Cisco has taken a third seat in the market.
"You kind of question: Where is [Cisco's]
StrataCom?" says analyst Scott Heritage with UBS
Securities. Yet he rates Cisco a buy, partly
because StrataCom accounts for only a small
portion of revenue, although it does represent
significant opportunities down the road. UBS is
not an underwriter for Cisco or Ascend. |
