Earnings Preview: Cisco needs to clarify product strategy
By Larry Dignan
May 7, 1999 5:30pm
ZDII
Cisco Systems Inc. (Nasdaq: CSCO) usually rounds out the earnings season with an upside surprise, strong sales and just enough caution to keep Wall Street from getting ahead of itself. This quarter, however, analysts want to hear about Cisco's product strategy.
Cisco (chart) will report its seasonally slow third quarter results on May 11. The First Call consensus calls for earnings of 37 cents a share and most analysts are expecting revenue of $3 billion.
As is usually the case with earnings reports, the official results don't amount to much. It's the outlook on the conference call that counts.
And that's where analysts are a little nervous. Aside from the usual landmines in upcoming quarters such as Year 2000 spending, analysts are growing increasingly concerned about gaps in Cisco's product line. Cisco's acquisition of Stratacom in April 1996 hasn't resulted in the "end-to-end solutions" that the company promised and Lucent Technologies (NYSE: LU, chart) and Nortel Networks (NYSE: NT, chart) already have.
Although voice networks are migrating to become data-centric, Cisco needs the bridges to connect the old with the new networks.
Analysts noted that Cisco still lacks Asyncronous Transfer Mode (ATM) and Frame Relay high-speed wide area network (WAN) switching equipment to compete with Ascend Communications, which is being acquired by Lucent. Meanwhile, Cisco's optical networking strategy consists of a partnership with Ciena Corp. If Ciena is bought -- and rumors are always flying -- Cisco is on its own.
"They need to fill in some holes in their portfolio," said David Powers, an analyst with Edward Jones.
Analysts point to Juniper Networks' April contract win to supply MCI WorldCom's UUNet unit with routers as a sign Cisco can't afford to slow down.
"The perception of what Cisco is telling us and what Cisco is showing us is different," said David Takata, an analyst with Gruntal & Co. In addition to Cisco's product strategy, here are some items to watch:
Service provider sales: Cisco's recent quarters have been carried by sales to service providers such as AT&T Corp. and Qwest Communications. Analysts are looking for more of the same. Sales to small- and medium-sized business should also be strong. Enterprise sales are expected to be about half the rate of the first two.
Year 2000 spending: In its last quarterly conference call, Cisco flagged Year 2000 spending as an unknown. What did Cisco see in the quarter and what's the outlook for the fourth quarter?
The acquisition strategy: Cisco's motto up until recently was to buy small companies close to home and integrate them. But the purchase of GeoTel Communications Corp. broke two of Cisco's standing acquisition rules -- it was pricey at $2 billion and GeoTel is based in Massachussetts, not exactly down the road from Silicon Valley.
Analysts said they expect Cisco to buy some larger prospects, but still won't fork over tens of billions for acquisitions despite the GeoTel precedent.
"GeoTel is still a small company, but Cisco just paid a lot for it," said Michael Cristinziano, Gerard Klauer Mattison.
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