Cisco counts on new products to spur growth

Networking giant unveils line of Wi-Fi phones, plans to release other products in coming months

After weathering the brunt of the information technology (IT) spending downturn, the largest telecom networking hardware maker is lashing back with a slew of new products set to be unveiled over the next couple of months.

At the NetWorld/Interop tradeshow in Las Vegas April 28, San Jose-based Cisco Systems Inc. (Nasdaq: CSCO) unveiled a new line of wireless, voice over Internet protocol (VoIP) telephones using the 802.11b Wi-Fi wireless standard.

Cisco stock, which is trading at 26 times earnings, rallied slightly and closed April 29 up more than 1 percent at $15.14 a share.

Cisco predicts cost savings for companies, as its new Wi-Fi phones could replace pagers, cell phones and walkie-talkies currently used in health care, maintenance and warehousing industries, where workers are rarely at assigned desks.

Cisco thinks hands-on products are a key to its future growth.

“Investments that increase the productivity of end users have a more compelling return on investment than investments that only focus on IT support costs,” says Don Proctor, Cisco’s vice president and general manager of its voice technology group. “If an enterprise makes an investment that increases the productivity of 5,000 end users by only 2 percent, that is like adding 100 more people to your staff.”

But at least one analyst isn’t buying the hype.

“Despite the press releases and chest thumping Å  when all is said and done, we see this as more of a marketing event than a driver of sales in 2003,” says Raj Srikanth, a New York-based analyst with Deutsche Bank. “We do not think the
wave of new products that is just beginning to be unleashed in the space is likely to have any meaningful impact on market share and the financial performance of companies in the current IT spending environment.”

Cisco holds more than a 65 percent share of the data networking market, 76 percent of the Layer 2 Ethernet market (the most-common technology used for corporate local area networks) and 73 percent of its network switching cousin, Layer 3, which is used by internetwork packet exchange (IPX) and AppleTalk internetworking protocols, according to Redwood City-based Dell’Oro Group research.

Its competitors, such as 3Com Corp. of Santa Clara, Foundry Networks Inc. of San Jose, Extreme Networks Inc. of Santa Clara and Juniper Networks Inc. of Sunnyvale, carve up the rest of those markets.

“We believe Cisco’s dominance of the networking space will remain unchallenged in 2003 to 2004 and expect to see some minor shifts in market shares of other players,” say Deutsche Bank’s Srikanth, who predicts consolidation in the sector.

Deutsche Bank has a significant banking relationship with Cisco and many of its networking competitors.

Cisco, which closed its fiscal third quarter April 26, is in a U.S. Securities and Exchange Commission-mandated quiet period and is unable to comment on issues that may affect its stock price until after it releases quarterly earnings May 6.

“We look to the networking giant to post revenue of $4.555 billion, which represents a sequential decline of 3 percent,” Mark Sue, a New York-based analyst with C.E. Unterberg, Towbin wrote in a research report.

“In our opinion, overall networking equipment demand is likely to remain muted
during this constrained IT spending environment,” he says. “Cisco may be particularly impacted due to its large size.”