Cisco router business hit as profits rise

Cisco Systems barely met analyst expectations on Tuesday when it reported quarterly earnings and noted a sequential decline in revenues for its IP router business.

On a yearly basis, the network equipment maker's second-quarter earnings for fiscal 2005 were up 29 per cent from the previous year. Cisco said it earned $1.4bn in the fiscal quarter ended 30 October, compared with $1.1bn in the year-earlier period. Results were in line with analyst expectations.

Chief Executive Officer John Chambers noted during a conference call with investors and analysts that revenue in Cisco's traditional Ethernet switching and IP routing business slipped during the quarter. Chambers didn't give specifics but financial analysts covering the company estimate the decline in the router business was 12 per cent from the fourth quarter of fiscal 2004.

Chambers blamed the dip in router revenue to the fact that the first fiscal quarter is typically seasonally weak. But Cisco's poor performance in this market is in stark contrast to its main competitor, Juniper Networks, which reported last month that it saw strong demand and growth for its routers during the quarter.

Erik Suppiger, an analyst from Pacific Growth Equities, said: "Juniper had a pretty decent quarter, so it's tough to say attribute this to seasonality. The truth is that Cisco has been underperforming in the router market for a while. Its growth rates have been pretty volatile over the past few quarters."

Chambers didn't specifically mention stiff competition from Juniper but he did say he expects more competition in the coming years from foreign companies, especially those in China. In the past, Cisco has specifically named Huawei Technologies and other Chinese companies as tough new competitors that can sell competing products at much lower prices.

Chambers said Cisco expects to see these competitors not just in China but globally. Cisco is already starting to compete with them in Europe, Africa and South America.

Cisco's router business is particularly vulnerable at the moment since it's in the middle of a product transition. In the past six months, Cisco has announced a slew of new products at the high-end and low-end of its portfolio.

Stephen Kamman, an analyst with CIBC, said: "The decline in the router market is not a positive indicator for Cisco. But it's difficult to know how much of it is the business itself and how much has to do with other macro economic factors or product cycle."

In September it announced the 1800, 2800 and 3800 access routers, which feature embedded security tools and support voice over Internet Protocol (VoIP) technology. In May, Cisco introduced the CRS-1, its ultra high-end router for the core of the internet. The company spent four years and $500m developing the CRS-1, but so far, the company has not generated any serious revenue from it.

Still, Chambers said he is optimistic about the CRS-1 prospects. He claimed that the company has completed two trials and is testing the box in at least 12 other networks.

"We are healthily paranoid about market transitions to our new products," he said. "We feel very good with the CRS-1 positioning. It takes several years to phase into core router installations."

Cisco also said that its board of directors has authorised up to $10bn in additional stock repurchases. Cisco has been buying back shares of its stock to offset dilution from granting employees more stock options. Cisco said in August that it had issued 162 million merit-based common stock options to employees, including 1.5 million to Chambers. Some critics say that Cisco should stop issuing stock options to employees and use its cash to pay dividends to investors.

Marguerite Reardon writes for CNET News.com