Slumping Cisco restructures

Faced with badly slumping sales, Cisco Systems is hoping that restructuring efforts and expanded services for new markets, including content networking and enterprise storage, will improve its outlook.

Cisco's surprisingly gloomy financial statement last week has triggered speculation that high times may be over for the one-time star of the high-tech industry.

The networker announced its third-quarter revenue would tumble some 30 per cent from the US$6.7 billion it posted in the second quarter. Cisco still expects to show a profit but claimed that per-share earnings would sink to the low single-digit range in the third quarter.

John Chambers, president and CEO of Cisco, said last week the recent turn of events "may be the fastest any industry our size has ever decelerated."

Cisco detailed a multipronged strategy to reduce costs, adding some 500 layoffs to the 8,000 announced in March. It will also take a restructuring charge ranging from $800 million to $1.2 billion and swallow some $2.5 billion in excess inventory.

Still, those cost-cutting moves appealed to some analysts, who suggested that Cisco's poor performance was brought on by the company's notoriously voracious acquisition strategy.

Cisco is expected to slow down the pace of its takeovers. Instead, according to Frank Dzubeck, president of the research firm Communications Network Architects, in Washington, the company may have to contemplate more OEM partnerships.

Another explanation offered for the Cisco's problems is that the market is now saturated with network equipment. "The enterprise business has dried up," Dzubeck said. "How many times do I need another router?"

Cisco will have to wait for "the next big killer app," according to Dzubeck. For example, a migration to the IPv6 standard could make current routers obsolete.

In the meantime, Cisco announced last week a partnership with Qwest Communications International Inc. to provide enterprise hosting services. Qwest's new Intelligent Content Environment will use Cisco gear to optimize Web server performance, deliver rich media on a per-use model, and provide LAN bandwidth speeds for business-to-business applications via legacy Internet connections.

The company is also entering the IP storage space, with its first effort being the SN5420 storage networking router, available this week. Cisco said analysts set the storage network market value at more than $4 billion in 2003.

An added bonus for Cisco is that companies are likely to need one of its Catalyst 6000 routers to support the SN5420, company officials said.

Cisco customers seem unconcerned about the company's woes. For example, DSL.net Inc., an ISP based in New Haven, Conn., uses Cisco routers in its networks. "We don't have any problems getting support or services," said Keith Markley, DSL.net's president and COO.

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