Cisco Limping From Sudden Shortfall

 
 
By eweek  |  Posted 2001-04-23 Email Print this article Print
 
 
 
 
 
 
 

Cisco Systems galloped like a racehorse for 10 years. Bred for speed and growth, it never slowed its breakneck pace.

Cisco Systems galloped like a racehorse for 10 years. Bred for speed and growth, it never slowed its breakneck pace.

When the racehorse crashed into the wall last week, announcing $2.5 billion in excess inventory and revenue 30 percent lower than the previous quarter, critics mused that it was a shame that Cisco wasnt part-plowhorse, slow and cautious.

But thats just not Cisco, the company that grew from nothing to one of the largest companies in the world, said Scott Cleland, CEO of The Precursor Group, a Washington, D.C. market research firm.

"Its like saying a thoroughbred should have been a camel, should have been able to walk through the Sierra Desert, Cleland said. "Theyve always gambled on the sector and the economy growing. Their whole philosophy is a gamble. Its easy to throw stones now, but it certainly worked extraordinarily for a long time.

The company has long preached the power of networking. "Cisco believed in the religion of the Internet — that this is different, that were different, said Paul Sagawa, an analyst at Sanford Bernstein.

Cisco CEO John Chambers compared the slowdown in spending by carriers to a 100-year flood, massive and out of the blue. "We went from a 70 percent growth rate to negative growth in January, he said. Cisco had so many orders late last year that it was telling customers delivery would take 26 weeks. Although the company tried to balance its books nightly, it wasnt prepared for the sudden falloff in orders and the cancellations. "No system can protect you from that, he said.

As the economy slowed and competitive local carriers were gasping with unworkable business plans, why was Cisco still financing deals with those troubled competitors?

Ammar Hanafi, Ciscos vice president of business development, had an answer last week. "Last year, vendor financing was part of the package that our customers evaluated on, he said. "Our accounting practices are so conservative that we have almost a disincentive to do vendor financing, but that was where the marketplace was. Well continue to be very conservative.

He said Cisco had $475 million in outstanding debt-structured loans to service providers at the end of December.

Cisco has enough cash on hand — about $4 billion at the end of 2000 — to weather the downturn. But 50 percent annual growth rates may be gone forever.

The 40-year average for technology growth is 11 percent per year, and that appears to be an ironclad rule that not even wavelength routers can break. "It represents our economys ability to absorb new technology, Sagawa said. "Theres not a way to force-feed it into society.

Cisco grew to be a giant through shrewd acquisitions, but struck out in its $500 million purchase of Monterey Networks. The California start-up was to provide the technology for Ciscos wavelength router, but the project was canceled this month. But Hanafi said acquisitions will continue to be key to the strategy. "Economics change, markets change, our strategy does not change, he said.

Analysts dont doubt Cisco will be a prominent player once inventories are played out in 12 or 18 months.

"Theyre winners and theyre leaders, theyll bounce back, Cleland said. "There are home run hitters and singles hitters. Cisco swings for the fences, and sometimes you strike out."

 
 
 
 
 
 
 
 
 
 
 

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