TSC article in reference to CSCO, ASND, BAY and COMS:
Top Stories: Cisco's Industry
Growth Figures Reflect Itself,
Not Its Peers
By Kevin Petrie
Staff Reporter
5/26/98 3:56 PM ET
Maybe Cisco (CSCO:Nasdaq) is using the royal "we."
Cisco for two years has said "we" see the data
networking industry growing revenue 30% to 50%
annually. And Wall Street, always looking for
guidance, listens. After all, Cisco owns about a
third of the sector's revenue and about two thirds
of its market capitalization, so it must know the
big picture.
"I think that's a good number," says Reed Bender,
a portfolio manager with Robert Bender &
Associates, which bought its first Cisco stock in
1990. "For the industry, I would say 30. For
Cisco, probably 30 to 50."
But Cisco's "industry" growth range looks more and
more like an individual range.
Cisco's boasts about industry growth actually show
that it is stealing market share and changing the
definition of its industry by raiding new markets,
especially with phone carrier customers.
Meanwhile, other parts of the Internet equipment
business, where Cisco has limited exposure, are
slowing. So traditional rivals such as 3Com
(COMS:Nasdaq), which is tied to low-end networking
products for corporations, are left out of the 30%
to 50% range.
Cisco's figures run "counter to all analysis I've
seen and that the company has referred me to,"
says Craig Johnson, principal at a tech consulting
service called The PITA Group. Johnson, who's
probed the issue with Cisco in a two-week
electronic dialogue, calculates that the 10 major
data networkers including Cisco grew revenue 24%
last year. Cisco increased revenue about 35% in
the year ended in January.
The research firm Cahners In-Stat Group says
networking hardware -- routers, switches and hubs
-- grew only 16% to about $27 billion in 1997.
In-Stat expects the same increase this year thanks
to price warring, and analyst Jeremy Duke is
considering reducing his estimate shortly after he
counts first-quarter revenue.
Cisco defends its industry growth range, though
the company says it applies only to strong
economies (so throw out Asia, one tenth of Cisco's
revenue last quarter). Its high-end business with
phone carriers, a market where Ascend
(ASND:Nasdaq) also has shown progress but 3Com has
missed, is a big plus. But the company also
includes tough-to-measure growth segments like
hybrid Internet-telephone systems, network
security software and optical fiber equipment --
some of which are new to data networking.
To support its claim, Cisco points to players such
as Vocaltec (VOCLF:Nasdaq) (60% growth last
quarter), Network Associates (NETA:Nasdaq) (33%)
and Ciena (CIEN:Nasdaq) (46%). Cisco intends to
tap into their growth potential by shipping
products similar to Vocaltec's and pairing with
Ciena in a partnership. Cisco, with deep pockets
and an expansive customer base, is better
positioned than its rivals.
Johnson wonders whether Cisco, long accustomed to
meeting Wall Street profit expectations, might be
giving investors the usual comforting words in
order to keep its stock price high. Cisco says it
simply is reading the market as best it can.
Cisco also might be wagging the 30% to 50% range
to show up its rivals. For example, last quarter
Bay Networks (BAY:NYSE) grew revenue only 7% from
one year ago, while revenue actually fell for 3Com
and Cabletron (CS:NYSE). A Cisco spokesman says
the company's forecast does account for the recent
shrinkage of traditional competitors.
"They want to try to minimize any type of fear
that the market's slowing," says Duke, with
Cahners In-Stat. He says the market is in fact
slowing and is growing below 30% even with new
markets included. In-Stat intends to make this
Cisco number gap the headline topic in its
conference call with brokerage clients on June 1.
"You could easily get to 30% growth for Cisco,"
says analyst Luke Szymczak at Prudential
Securities, especially counting its attack in the
phone carrier market. Szymzcak's firm is not an
underwriter for the company.
Overall market growth is more sober. Szymczak
anticipates about 17% to 18% annually. |
