Cisco Systems Inc. is perhaps best positioned to benefit from the growth in the carrier market and to sustain market share in the enterprise arena because of the momentum that comes from being the industry leader. "This is a company with just tremendous financial and people resources," Mr. Schopick of Nutmeg said. "It executes perfectly and they really have a very strong customer franchise."
Indeed, Cisco's relationships with its customers are said to be very strong, making it difficult for other companies to lure them away. "Customers have confidence they will deliver the next-generation product," said Chris Stix, an analyst with S.G. Cowen.
The vast majority of Cisco's business is still geared toward the enterprise market, but the company has been investing heavily in research and development for carrier-oriented products. The effort has paid off, as Cisco has been most successful in transitioning to capitalize on the growth of the carrier market and, according to some estimates, its carrier business is growing at a 70% annual clip. But success comes at a price: The company's operating expenses increased about three percentage points over last year, Mr. Sagawa of Sanford C. Bernstein said.
Cisco provided further evidence of its aggressive move into the carrier market with its plan, announced Tuesday, to acquire GeoTel Communications Corp., which specializes in the software needed to route calls through calling centers.
In all, Cisco's continuing position as the market leader should produce a profit for its fiscal third quarter, ending in April, of 38 cents a share on revenue of $3 billion, Mr. Sagawa said. Analysts expect earnings of 37 cents a share, according to a First Call Corp. survey.
The Wall Street Journal -- April 19, 1999
Network Concerns Expected to Post Robust Profits
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By Nancy Beiles
Dow Jones Newswires
NEW YORK -- Most computer-networking companies should report solid earnings gains for the first quarter, but those results could obscure the pressure on some companies from what is increasingly a two-tiered market for network equipment.
The overall health of computer-networking companies may be better gauged by whether they focus on the telecommunications market or the business market.
Those, such as Ascend Communications Inc., that have a strong position in the carrier market -- as the telecommunications segment is known -- should benefit from the rapidly growing number of telecommunications companies that are building networks to handle both data and voice traffic.
"Those companies that are positioned with products to serve the carrier market are positioned to enjoy a more accelerated rate of growth," said Andy Schopick, an analyst with Nutmeg Securities.
Companies such as Fore Systems Inc. that primarily focus on the business -- or enterprise -- market are more vulnerable to that segment's inability to sustain the stellar growth rates achieved in the earlier part of the decade. That is part of the pressure facing both 3Com Corp. and Cabletron Systems Inc., which, with fiscal quarters that ended in February, already reported lackluster results.
Most businesses in the developed world already have networked their computer systems, so most enterprise revenue is derived from product enhancements for an existing network, rather than from the more expensive equipment needed to build a new network. As a result, enterprise business probably will grow 13% in 1999, down from 15% in 1998, according to estimates from Sanford C. Bernstein.
The deceleration is particularly stark in comparison with the early 1990s, when enterprise business typically grew 50% to 60% a year as companies spent heavily in a rush to connect their computers in a network for the first time, said Sanford C. Bernstein analyst Paul Sagawa.
By contrast, the carrier market is expected to grow 35% to 40% this year, Mr. Sagawa said.
As the Internet becomes ubiquitous, telecommunications companies have seized the opportunity to build networks that can transmit data as well as traditional voice traffic. At the same time, industry deregulation has spawned a new generation of start-up telecommunications carriers that are hoping that by building state-of-the-art networks, they will be able to unseat industry stalwarts.
Together, these trends have produced a network-building frenzy that translates into a robust selling environment for the makers of carrier-network equipment. And in contrast to the enterprise market, the rapid growth of the carrier market is expected to be more sustainable -- both because the Internet is expected to keep growing and because deregulation abroad is just beginning.
Cisco Systems Inc. is perhaps best positioned to benefit from the growth in the carrier market and to sustain market share in the enterprise arena because of the momentum that comes from being the industry leader. "This is a company with just tremendous financial and people resources," Mr. Schopick of Nutmeg said. "It executes perfectly and they really have a very strong customer franchise."
Indeed, Cisco's relationships with its customers are said to be very strong, making it difficult for other companies to lure them away. "Customers have confidence they will deliver the next-generation product," said Chris Stix, an analyst with S.G. Cowen.
The vast majority of Cisco's business is still geared toward the enterprise market, but the company has been investing heavily in research and development for carrier-oriented products. The effort has paid off, as Cisco has been most successful in transitioning to capitalize on the growth of the carrier market and, according to some estimates, its carrier business is growing at a 70% annual clip. But success comes at a price: The company's operating expenses increased about three percentage points over last year, Mr. Sagawa of Sanford C. Bernstein said.
Cisco provided further evidence of its aggressive move into the carrier market with its plan, announced Tuesday, to acquire GeoTel Communications Corp., which specializes in the software needed to route calls through calling centers.
In all, Cisco's continuing position as the market leader should produce a profit for its fiscal third quarter, ending in April, of 38 cents a share on revenue of $3 billion, Mr. Sagawa said. Analysts expect earnings of 37 cents a share, according to a First Call Corp. survey.
In the year-earlier period Cisco had operating earnings of 30 cents a share, adjusted for a 3-for-2 stock split, on $2.18 billion in revenue.
Fore Systems has been less successful in moving into the carrier market. The company, which is best known for its strength in a special kind of packet-switching technology -a- synchronous transfer mode -- is heavily dependent on the enterprise market for its revenue and that puts it at a disadvantage, Mr. Schopick said.
Fore "must reach beyond ATM and Ethernet [local area network] switching," Mr. Schopick said. "The biggest challenge is to develop its presence in the carrier market."
It may be difficult for Fore Systems to meet those challenges, however, given the competition from Cisco and a management team that has been inconsistent in execution, Mr. Schopick said.
Many industry watchers expect that those issues will be resolved by a takeover. In the wake of a wave of consolidation in the industry, Fore Systems is one of few major publicly traded computer-networking companies left. Xylan Corp. recently was acquired by Alcatel SA, Bay Networks Inc. was acquired by Northern Telecom Ltd. last year, and Ascend will become part of Lucent Technologies Inc. later this year, if a planned deal goes through. With a number of telecommunications companies eying the assets of computer-networking companies, industry watchers say Fore Systems could be the next computer-networking company to be bought.
Meanwhile, Mr. Schopick expects Fore Systems to report revenue of $170 million to $175 million and earnings of 12 cents a share, before extraordinary items. The First Call consensus is 11 cents. In the year-earlier fiscal fourth quarter, the company earned 13 cents a share on $131 million in revenue.
Ascend derives 90% of its revenue from sales to telecommunications carriers. As such, it is seeing strong growth in its business. Mr. Sagawa expects the company to report first-quarter earnings of 38 cents a share -- two cents above the First Call consensus estimate -- on $515 million in revenue. A year earlier, Ascend earned 26 cents a share on $305 million in revenue.
Proxim Inc., which specializes in wireless LAN equipment, is benefiting from its niche in an emerging segment of the enterprise market.
Proxim is the only company that focuses exclusively on wireless LAN, Lazard Freres & Co. analyst Michael Duran said. He notes that wireless LAN technology is growing increasingly important to a number of industries, including health care, manufacturing and hospitality. The technology allows employees working in different locations to communicate and access a computer network through small wireless devices.
Analysts surveyed by First Call expect Proxim to earn 14 cents a share for the first quarter, compared with eight cents a share a year earlier.
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