Challenging Cisco's dominance

22 June 2006

While many of the established old-guard have struggled to compete in a changing technological landscape, Cisco’s dominance remains implacable.

“Not only is the network becoming the primary driver of IT, it is also becoming the primary driver of all forms of communication,” beamed John Chambers, CEO of network equipment maker CISCO SYSTEMS as he announced the company’s results for the quarter ending 29 April 2006.

And he has reasons to be cheerful. Firstly, the adoption of IP networking in all manner of contexts has driven record revenues at Cisco: it earned $7.3 billion in its third fiscal quarter which – discounting the impact of Cisco’s acquisition of digital TV set-top box maker Scientific-Atlanta – represents year-on-year growth of 12%, comfortably ahead of the industry average.

Secondly, Chambers has been rewarded for this performance with the position of chairman which he will hold as well as the CEO spot. And thirdly, he can put a smile on his shareholders’ faces with a $5 billion share buy-back scheme also announced this month.

And Chambers can now wallow in more than just glory. After exercising his share options in May 2006 he became $9.7 million better off overnight.

Flushed with his own success though he might be, Chambers will not have missed the even more impressive performance of one of Cisco’s chief competitors, JUNIPER NETWORKS. Although dwarfed by Cisco, Juniper is expanding rapidly – its own quarterly revenue figure grew 26% from $450 million in 2005 to $566 million for the quarter ending 31 March 2006.

Juniper’s growth has catapulted it into Standard & Poor’s 500 Index, which is used as a benchmark against which investors compare other stocks. “This recognition is a result of our steady growth,” said Juniper’s chairman and CEO Scott Kriens.

To date, Juniper has built its growth serving enterprise and telecom operator customers; however, it also hopes to branch into the consumer market through Internet television developments. It recently announced a deal to provide the firewall for Microsoft’s IPTV software, and has a variety of IPTV offerings in the pipeline.

But telecom equipment maker Nortel Networks is in danger of being left behind in the next-generation network gold rush. Nortel has spectacularly failed to capitalise on the convergence of voice and data networks, and could well miss out on video-related spending.

Revenues at the company have flat-lined: for its quarter ending 31 March 2006, revenues fell slightly from $2.39 billion in 2005 to $2.38 billion in 2006. Moreover losses were up from $104 million to $167 million.

But in the face of such a dire performance NORTEL CEO Mike Zafirovski was optimistic,predicting a new era at Nortel in which it would gain 20% share in key markets.

Perhaps his optimism will now be muted, though. It was announced in June that a proposed ‘ultra-broadband’ joint venture with a company that all the networking giants will be keeping a close eye on – Chinese communications equipment supplier Huawei – had fallen through.

IT services

Revenues were similarly stagnant at IT services giant COMPUTER SCIENCES CORP (CSC), which recorded $3.88 billion in its quarter ending 31 March 2006 – the same figure it reported the year-ago quarter. Although CSC’s executives argued that currency fluctuations meant this figure represented 3% growth, even that generous reading cannot hide the disappointing result. The company appears to be feeling the strain of supporting an international outsourcing operation, especially in Europe.

“For some time it has been apparent to us, and to other companies in our industry, that there is excess capacity in certain geographies, particularly Europe,” said Van Honeycutt, CSC’s CEO. The company is expected to make significant job cuts in Europe, with much of the work expected to go to India. Such a move would be regarded by some market analysts as preparation for a sale. Earlier in 2006, rumours circulated that Hewlett-Packard was considering purchasing the company, although this was never confirmed.

The becalmed CSC compares unfavourably to Indian rival WIPRO TECHNOLOGIES. Its revenues grew a healthy 33% in its latest quarter ending 31 March 2006, moving up from $525 million to $700 million.

While CSC is looking for suitors, weighed down by its European operations, Wipro has been shopping on the continent. In June it announced the acquisition of two European companies, Finnish design and engineering services provider Saraware and Portugal-based retail solutions provider Enabler Informatica.

“The IT services industry is evolving from an era of routine service provisioning to one of innovative knowledge creation,” said Azim Premji, the chairman of Wipro Technologies. “The strategic initiatives we propose to undertake as part of our plan over the next few years position us very well to lead this evolution.”

The acquisitions are relatively low-risk for Wipro: the target companies are tiny in comparison, and even if European wages are higher than Indian ones, the companies will not affect Wipro’s mammoth margins. It also offers Wipro the opportunity to gain sector-specific expertise which it can then leverage across the globe.

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