Tags: cisco | turmoil | networking | equipment | switchers | routers

Cisco in Turmoil. What’s Next …

By Dan Weil   |   Wednesday, 20 Apr 2011 12:43 PM

Several big technology companies have seen their products saturate the market and get commoditized, slowing their growth down to a trickle. That’s not good news for share prices. For instance, the stocks of Microsoft (MSFT) and Intel (INTC) have essentially done nothing over the past 10 years, thanks to these pressures.

Probably no company is hurting more now than Cisco (CSCO), the world’s largest provider of networking equipment. Its core business — switchers and routers — has turned into one with substantial competition and low margins.

Cisco’s forays into consumer businesses have amounted to little more than money spent. The tech bellwether has expanded into more than 30 new businesses, including servers and consumer video, creating an opportunity for competitors to intrude into its flagship areas.

This may be a stock to avoid until its long-term direction is clearer. Cisco’s gross margin, the percentage of profit left after subtracting production costs, dropped to 62.4 percent in the quarter ended Jan. 29, failing to meet the 63.3 percent average estimate of analysts surveyed by Bloomberg.

"Cisco was one of the only networking companies to report sequential revenue declines in what was a healthy IT (information technology) spending environment," Piper Jaffray analyst Troy Jensen wrote in a report.

"The company is clearly losing share in two significant product categories, with switching sales down sequentially for three consecutive quarters and router sales declining 8.9 percent quarter-over-quarter."

Cisco CEO John Chambers acknowledged the company’s problems in an email to employees.

"We have been slow to make decisions, we have had surprises where we should not, and we have lost the accountability that has been a hallmark of our ability to execute consistently for our customers and our shareholders," Chambers says. "That is unacceptable. And it is exactly what we will attack."

He admits that Cisco has lost some of its credibility and must earn it back. "And the time is right to define this transition for ourselves and our industry," Chambers writes.

Nevertheless, Chambers hasn’t specified exactly what the company will do to break its fall. The stock has slid 12 percent over the last decade.

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Several big technology companies have seen their products saturate the market and get commoditized, slowing their growth down to a trickle. That s not good news for share prices. For instance, the stocks of Microsoft (MSFT) and Intel (INTC) have essentially done nothing...
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