Cisco Slips in ATM Switch Market By Kevin Petrie
Staff Reporter
5/7/99 1:28 PM ET
SAN FRANCISCO -- Uncharacteristically,
Cisco
(CSCO:Nasdaq) doesn't seem to have the
answer to the
growth of a pivotal network technology.
Cisco has failed to develop a new
"asynchronous transfer mode"
switch, which telephone carriers are
installing on their networks
to direct long boxcars of Internet traffic. ATM
switches are more
dependable than the "Internet protocol"
systems Cisco is
promoting, and so far seem the best way to
combine voice and
data signals. Researcher Dell'Oro Group says
ATM sales grew
49% to $3 billion last year.
Now Cisco, which is expected next week to
report strong
third-quarter earnings and revenue growth,
finds itself lagging
further behind competitors Nortel (NT:NYSE)
and Ascend
(ASND:Nasdaq) (set to merge with Lucent
(LU:NYSE) by late
June). The divergence threatens to erode
Cisco's market share in
the carrier ATM business, which according to
Dell'Oro fell to
19% in the fourth quarter from 23% in the first
quarter of 1998.
In the same period Nortel's and Ascend's
market shares
expanded to 25% from 18% and to 23% from
18%, respectively.
So Cisco is in a bind, and its usual crisis
tactics might not do
their magic this time. Typically the San Jose,
Calif.-based
company responds to market shifts by
acquiring technology or
applies the marketing charm to its Fortune
1,000 clients. Those
maneuvers, coupled with superb managerial
skills, explain how
Cisco's sales have swelled to $10 billion over
the last four
quarters and its market cap has ballooned to
$174 billion since
the company booked its first sale in 1986.
This crisis is different. Cisco's new target
clientele, carriers such
as AT&T (T:NYSE) and Sprint (FON:NYSE),
boasts closer ties
to the competition. And there are few ATM
companies available
for Cisco to acquire.
Cisco has canceled development of an ATM
switch called the
TGX 8750, widely viewed as a crucial product
for competing with
Nortel and Ascend. Instead, it intends to
incorporate TGX
features, including wide optical-fiber
connections, into an older
8850 product line and re-release it early next
year.
Cisco won't say when it made the decision.
The company
discreetly noted the product change on its
Web site in early April,
but didn't make executives available to
discuss the move, which
was reported Monday by the trade publication
Network World.
The stock has slipped mildly this week along
with the Nasdaq, to
106 15/16 Thursday from 114 1/16 last Friday.
Cisco is down
nearly 10% from a 52-week high of 118 3/4 on
April 7; it now
trades at 130 times trailing four-quarter
earnings.
Next Tuesday Cisco is expected to announce
a 23% increase in
operating profits for the fiscal third quarter
ended in April, and
should even report growth in its business
with carriers. Equity
analysts are standing pat with their buy
recommendations and
their bullish estimates. But Cisco's failure to
deliver such an
important product raises unfamiliar doubts as
the pros study
their favorite stock.
"It shouldn't just be brushed under the
carpet," says one analyst,
who rates the stock a buy and did not want to
be identified. His
firm has no banking ties to Cisco. A year from
now, "if you don't
have a product and you're not there soon
enough, you can't win
the business."
In the past, Cisco has successfully adjusted
to shifts in customer
tastes. In 1993, Cisco spent $90 million stock
buying
Crescendo, a 60-employee start-up in
Sunnyvale, Calif.,
branching from network routers into the
emerging switch
business and juicing its revenue growth for
several years.
As it grew more powerful, Cisco used
marketing to cover up bad
moves: It promoted the need for "universal
standards" to buy a
year and a half of time to integrate the
ill-fitting technology of
Granite Systems into its product line. The
marketing spin was
"classic Cisco," says analyst Craig Johnson
with the Pita Group
consulting firm, who owns Cisco shares.
This time Cisco is in a tighter spot. For one
thing, marketing is
more challenging, because it is trying to court
business with
carriers which know Nortel and Lucent much
better than they
know Cisco. And while Cisco struggles with
ATM, Nortel and
Ascend already deliver strong ATM offerings.
So winning significant contracts remains
difficult. A month ago,
Cisco announced plans to furnish AT&T with
so-called IP+ATM
switches; however, AT&T says it still
primarily uses ATM
equipment from Ascend. AT&T expects to
grow IP traffic in
coming years, but for now still needs Ascend
ATM gear.
"They're walking into places where they are
not the established
vendor," says one industry analyst who has
worked for a Cisco
rival. "They are seeing competition like they
haven't seen before."
Cisco has delayed other ATM products.
Several analysts say the
company was six months late in furnishing
Sprint with a switch
from its 8800 product line for Sprint's ION
network, designed to
meld voice and data traffic. Sprint confirms
this, although an
official says it fully expected the delay and is
proceeding with
construction as planned. Sprint activated
certain ION services
early this year and has signed 12
corporations in 26 cities for the
service. Cisco says that, despite certain
shifts in timing, it
delivered the equipment on schedule.
"The problem they have right now is
credibility in the product
road map," says Rosemary Cochran, principal
with Vertical
Systems Group, a market researcher in
Dedham, Mass.
Cisco also faces greater challenges this time
because there are
fewer acquisition candidates to fill its ATM
hole. Ascend gobbled
ATM concern Cascade in mid-1997. Last
week, Fore Systems
(FORE:Nasdaq), a prime ATM supplier, agreed
to merge with
GEC of Britain for $4.5 billion in cash.
While ATM company Newbridge Networks
(NN:NYSE) of
Kanata, Ontario, remains independent, it has
had trouble
executing. Newbridge, with revenue of $1.7
billion and a market
value of $5.2 billion, is much larger than any
company Cisco has
ever acquired. The private start-ups Netcore
and Nexabit are
testing routers that handle ATM, but remain
focused on Internet
protocol. Cisco defines itself as an IP leader.
"It would be very hard for Cisco to admit they
have to buy an IP
company," says the industry analyst.
The TGX snafu all started with an acquisition
gone bad. Three
years ago, Cisco bought StrataCom, a builder
of ATM switches,
for $4 billion in stock. Cisco has done little to
upgrade
StrataCom's BPX switches since then. The
TGX was supposed
to restore StrataCom's worth.
Speaking in his offices Monday -- before Cisco
stopped
answering TSC's inquiries about the TGX -- a
marketing vice
president, Larry Lang, said he was surprised
that carriers and
ISPs still counted for only one-third of Cisco's
revenue. He says
that is because corporations, historically
Cisco's strength, have
continued to generate strong sales.
Given Cisco's frustrations with carriers, that
route might be the
company's best hope for keeping its 30%
growth intact.
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