>>Drastic price cuts and intense competitions from big boys like LU and INTC will have tremendous marhgin pressure on CSCO.
Actually, re: LU, you have it backwards, as Cisco is taking share away from LU in its traditional markets. The DLJ report makes that abundantly clear.
The Wall Street Journal -- January 6, 1999
Network Firms
Expect Gains
For 4th Period
---
Gear Demand Stays High
As Customers Expand
Data-Highway Capacity
----
By Joelle Tessler
Staff Reporter of The Wall Street Journal
The leading computer-networking companies should report solid earnings gains for the fourth quarter, led by strong demand for equipment used to build out the Internet and to set up corporate networks.
Although the usual end-of-quarter "prerelease" concerns have surfaced on a few names-among them Fore Systems Inc.so far none of the networking companies has issued a disappointing earnings outlook for the period. Analysts say overall trends were strong for the group in the final part of 1998.
SG Cowen Securities Corp. analyst Chris Stix believes revenue grew at least 9% to 10% in the fourth quarter over the prior quarter for the big networking companies, which continue to capture market share from smaller players and drive industry consolidation.
In the carrier -- or telecommunications-market, deregulation and the emergence of new players such as the competitive local-exchange carriers are driving robust growth, according to Nutmeg Securities'
Andy Schopick.
Phone companies ranging from AT&T Corp. to the Baby Bells to the CLECs, as well as Internet-service providers, are all spending heavily to build-out data networks and to develop the capacity to put voice traffic over them, said Hambrecht & Quist Inc. analyst Farrokh Billimoria.
"With the Internet becoming more and more critical to people's survival, carriers have to spend on it," he said.
This has spurred strong demand for asynchronous-transfer mode and frame-relay switches in particular, as well as for remote-access equipment.
In the enterprise -- or corporate-market, demand is also solid as companies "spend off the remainders of their 1998 budgets," said Sanford C. Bernstein & Co. analyst Paul Sagawa.
This is driving sales of fast Ethernet and gigabit Ethernet products and Layer 3 switches, which can perform many of the functions of routers but are much cheaper.
While the aggressive growth in the carrier-networking market is widely expected to continue, analysts are split on the outlook for the enterprise side of the business.
Mr. Sagawa believes corporate spending on networking equipment could slow in 1999 as U.S. companies feel the effects of the economic turmoil overseas and scale back their capital budgets. He says revenue growth in the enterprise-networking market could fall to 13% or less in 1999, compared with 15% in 1998.
He added that pricing pressure in the enterprise market, which began in hubs two years ago and spread to low-end switches in 1997, has now hit modular and stackable switches. Lower prices could also contribute to deceleration in enterprise spending, the analyst believes, since "companies can get everything they need by spending less."
Not everyone, however, sees things this way. While Mr. Stix agreed that enterprise spending on information technology could slow in 1999, he believes many companies still are investing in their computer networks.
The results from the two major networking companies with quarters ended in November -- 3Com Corp. and Cabletron Systems Inc. -- were mixed.
3Com beat earnings estimates for its fiscal second quarter by a wide margin, indicating the company is recovering from the bloated inventory levels and sluggish modem sales that plagued it earlier in
1998. 3Com posted earnings of 36 cents a diluted share, above the consensus estimate of 31 cents and the restated one cent a share posted a year earlier.
The company saw strong consumer demand for 56K modems and its hand-held Palm Pilot computing device with back-to-school purchases in the early part of the period and holiday purchases later. New products such as the CoreBuilder 9000 local-area network switch also drove
revenue growth.
In addition, 3Com is seeing margin expansion as it manages costs better and ramps up manufacturing after slowing production earlier in the year to bring down inventories.
Cabletron, on the other hand, missed expectations that were scaled back after it had warned that estimates for its fiscal third quarter were too high. The company posted a loss of 50 cents a share, below the consensus view of a 10-cent loss and yearearlier earnings of 12 cents.
Cabletron blamed the results on lower-than-expected sales to Lucent Technologies Inc. Northern Telecom Ltd. Sales to both telecom-equipment makers have slowed as they have built up their own data operations, including through Nortel's recent purchase of Bay Networks.
Mr. Stix expects Cisco Systems Inc. to beat his estimate of 35 cents a share for its fiscal second
quarter, which ends in January, by a few cents. He believes his revenue projection of $2.7 billion is probably conservative. Cisco posted splitdjusted earnings of 29 cents a share on $2 billion in
revenue a year earlier.
Mr. Stix noted that Cisco leads in most segments of the industry, including LAN switches and routers. The company also holds "strong leadership positions" in carrier-networking gear, including access concentrators, he said.
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