To: Les H who wrote (63884 ) 12/7/2000 1:22:27 PM From: Les H Respond to of 99985 Investors scramble to place bets on Cisco Trading volumes soar: CEO predicts Cisco will 'break away' from competitors Simon Avery Financial Post SAN JOSE, Calif. - Trading volumes have been double their norm for Cisco Systems Inc. in the past five sessions. Investors are placing big bets on whether the technology bellwether can recover from a steep slide that had knocked as much as 45% off the network equipment maker's stock price since its US$82 high last March. In heavy trading yesterday, Cisco shares (CSCO/NASDAQ) slipped 11/16 to close at US$51 7/16. The bears see an economic slowdown that threatens to stall the buildout of the Internet and related networks. They are also concerned about warnings from big telecommunications companies who say they will trim their capital spending plans in light of falling revenue, rising costs and less access to borrowed money. The bulls side with John Chambers, Cisco's evangelical president and chief executive, who on Monday remained steadfast in his earlier guidance that the company will see last year's sales of US$18.3-billion increase between 50% and 60% in the 2001 fiscal year ending in July. "I have never been more optimistic about the market," Mr. Chambers told 500 industry and financial analysts at an annual company event in San Jose this week. He put the odds at 70-30 that Cisco will "break away" from competitors like Nortel Networks and Lucent Technologies in the coming quarters, due in large part to a fundamental change in the market on which, he says, Cisco is best suited to capitalize. As networks grow more complex, customers are moving toward single suppliers that can provide end-to-end products. The shift, Mr. Chambers said, will favour a few large players over more specialized competitors like Juniper Networks, which makes high-end routers (devices that decide which direction to send information along networks) and Ciena, which makes optical equipment. Mr. Chambers claims Cisco has the broadest range of products, with 12 lines producing more than US$1-billion each in revenue. If the company executes right in the next year, it will have 24 product lines, each doing more than US$1-billion in sales, he said. Timothy Smith, principal analyst with the research firm Dataquest, gives Cisco credit for making inroads into the lucrative telecom market, a business previously dominated by Nortel and Lucent. But he says it's overly aggressive to think Cisco will top its two biggest competitors in this space. Other analysts predict Cisco could see a slowdown in its biggest division, which sells equipment to large businesses building their own internal networks. Growth has already slowed for Cisco competitors in this area, said Russell Schnurr, a research analyst at the Gartner Group. "The hunch I have is Cisco may be a quarter or two away from slowing down like the rest of the market." Cisco's enormous market share in the sector has given it some reprieve, but demand for equipment to build local area networks is saturated, while at the low end of the router market there is actually negative growth, Mr. Schnurr said. A slowing economy and commitments from AT&T, Worldcom, Williams Communications and Bell South to lower their capital expenditures are casting a pall over the entire networking equipment market -- a potential problem Mr. Chambers accepts. "Make no mistake. If capital expenditure declines, the IT market will get hit," he said. "We are not immune by any means, but we will probably not be affected to the same degree as our competitors." That's because the bulk of capital spending today is going into the new networks built on Internet protocol, Cisco's specialty, company officials say. But Mr. Chambers also says spending cuts in Cisco's market will be cushioned by the productivity gains companies are starting to get from their networks. Many investors and analysts at Cisco's conference this week said the company's credibility remains among the highest in the industry. But in a question and answer session with Mr. Chambers, they voiced a number of concerns, including problems getting products to customers fast enough. In an effort to reduce lead times, last quarter Cisco boosted inventory by 58.5% to US$1.96-billion. Another area of concern was Cisco's growing habit of financing its customers so they can buy more equipment. The company has US$2.4-billion set aside today for structured loans, the most risky type of vendor financing. Tejinder Singh, managing director of New York-based Reliance Capital Management, pointedly asked Mr. Chambers why the company didn't stop financing companies with poor business models. Mr. Chambers said the loans are strategic and help Cisco push into new markets like cable and wireless.