Cisco Earnings Disappoint; Weak in Optical Products

The dominant enterprise router and switch vendor, Cisco Systems, will have to field new optical and other products to return to the hyper growth rates of recent years.

After Ciscos disappointing second-quarter earnings announcement, analysts said the company would be at the mercy of general economic conditions, the capital markets and competitors with optical networking gear, gigabit Ethernet switches and other carrier products.

“This is not going to be the same growth story going forward that it has been in the past,” said Andy Schopick, a securities analyst at Nutmeg Securities, after Cisco disappointed Wall Street with lower than expected revenue and earnings last week. “They will probably face the most difficult challenges they ever have in the next six months.”

Cisco reported $6.75 billion in revenue — up 55 percent from last year but below estimates of $7.1 billion to $7.2 billion — and earnings per share of 18 cents, a penny less than anticipated. It was the first time Cisco has missed a quarter in seven years, and management admitted it was surprised by a sudden slowdown in business in December, especially from emerging carriers and manufacturers in the U.S.

Optical product sales fell 31 percent to $342 million from $493 million in the first quarter, said Paul Johnson, an analyst at Robertson Stephens.

Most of those sales were of Synchronous Optical Network access devices to emerging carriers, a “business that fell dramatically for Cisco,” said Nikos Theodosopoulos, an analyst at UBS Warburg.

Cisco has yet to field a slam-dunk new optical product. Its Monterey project is still in development.

Rosemary Corcoran, a principal at the Vertical Systems Group market research firm, noted Cisco “is not landing the core optical deals that are coming down.”

Theodosopoulos said Cisco has had some success selling Digital Subscriber Line systems to carriers, but still needs a digital loop carrier transport system. He projects revenue next fiscal year growing 16 percent, with a growth rate of 30 percent in the fourth quarter.