Telco troubles weigh heavy
Cisco has embarked on an ambitious strategy the past two years to tackle the needs of telecommunications firms--companies that spend billions each year to upgrade their global networks. In doing so, Cisco embraced a new set of competitors head on, such as Nortel Networks, Lucent Technologies and Ciena, among others. Cisco, in typical fashion, has spent in excess of $10 billion to enter the market. But just as it honed this strategy, demand appears to have ebbed--at least in the short term.
Cisco's carrier-business strategy is centred on new emerging carriers, such as DSL service providers and Internet data operators, some of which are struggling financially. And because the service providers are struggling to turn a profit, Cisco isn't able to sell as much networking equipment. Furthermore, the company has loaned exorbitant sums to some questionable firms, though it maintains that its customer financing practices are conservative.
"The argument for buying Cisco (stock) was that the demand for the Internet is infinite," Sagawa said. "But broadband isn't rolling out that quickly and people aren't using the Internet that much more. Growth seems to be decelerating. If demand isn't infinite, the same economic rules apply for any product produced in the world."
Many investors expected Cisco to dominate the carrier landscape like it did in the business market, but that now seems unlikely, analysts said. Cisco will just be one among several suppliers, a slight change from its past when it was the only router-maker in town.
But there is reason for optimism. Telecommunications spending, despite all the doom and gloom, is expected to grow this year--just at a lower rate than expected. In addition, network operators are putting most of their spending toward newer Internet-friendly equipment, which plays right into Cisco's expertise.
Despite some recent high-profile executive flights and increased interest in start-ups among Cisco's engineering corps, the company also has what is widely recognised as a deep bench. That could, however, come under further stress since the company's stock has typically doubled every year in recent years--something that won't occur this year.
And then there is Chambers, widely recognised as one of the great motivators and customer-driven chief executives in the technology business and as savvy a player as they come.
Spalding, the Epoch analyst, said Chambers has lowered expectations so much for the next two quarters, that Cisco can probably easily beat the numbers. That way, Cisco can build momentum for Wall Street to have faith in the company again, he said.
"Chambers is savvy and he knows how to manage the Street. He doesn't like to disappoint, but he'll do it all at once," Spalding said. "In reality, he probably has visibility of better numbers. It's all about managing expectations, and Cisco is the master at that.
