Sector by sector: Enterprise infrastructure
In enterprise infrastructure, Cisco continues to be the benchmark against which others are measured.
 Revenue was up 32% by the time the behemoth closed the books on fiscal 1998 last July, growth fired in the main by strong enterprise and carrier sales. Profits were up a comparable percentage to $1.9 billion. Some enterprise infrastructure companies saw larger percentage gains, but none grew as much. After all, that 31% hike added $2 billion to Cisco's revenue column. That's the equivalent of bolting on one and a half Cabletrons.
The stock market has rewarded Cisco handsomely for its performance. In fact, Cisco President and CEO John Chambers loves to show a slide displaying how the market capitalization of Cisco - now roughly $155 billion - is greater than the combined market capitalization of his top 10 competitors. That looks impressive, but it is a half-truth. He's not including the likes of Lucent, Ascend or Nortel in that total, even though the company clearly views them as competitors.
The companies that made up the once mighty troika that competed head to head with Cisco - 3Com, Cabletron and Bay Networks - are, in a word, struggling.
3Com's revenue slipped 3% last year to $5.4 billion, and the company posted a paltry $30 million in profits. The latter reflects one-time charges associated with the U.S. Robotics acquisition, a deal that was finalized in the first quarter of fiscal 1998. If you exclude those charges, pro forma net income was a respectable $543 million, a 10% profit margin.
Nonetheless, when the U.S. Robotics merger was announced, it was defined as a pooling of interests and the deal was valued at about $6.6 billion. That was either overly optimistic or the company still has a ways to go to get back to where it started.
Surprisingly, 3Com is struggling most in its core market. Sales of client access products - network interface cards and modems - were down 8% to $2.9 billion. Sales of system products - hubs, switches, routers and the like - were up 3% to $2.5 billion. 3Com says the PalmPilot is its fastest growing product line.
Cabletron also saw revenue dip last year, a 2% step backward that left the company with $1.38 billion in sales and a loss of $127 million. If you back out charges associated with the acquisition of Digital's Network Products Group and charges for a corporate reorganization, net income would have come in at $130 million in 1998.
Due to the company's odd fiscal year, which ends in late February, Cabletron has already closed the books on 1999. And at least this time around revenue is moving in the right direction, inching up 2% to $1.41 billion. Losses, however, are mounting. The company posted a loss of $239 million for 1999. And even backing out special charges for acquisitions - NetVantage, FlowPoint, YAGO Systems, and the digital subscriber line access multiplexer division of Ariel - still leaves a loss of $7.1 million.
Cabletron Chairman and CEO Craig Benson has his work cut out for him.
Things at Bay are harder to account for considering it was swallowed by Nortel. Suffice it to say that, while Bay improved under the direction of new CEO David House, it was clear that teaming with a larger player was a smart long-term move.
It will be interesting to see if Cabletron comes to a similar conclusion this year. It's fairly easy to imagine one of the huge overseas telecom powerhouses, such as Alcatel, swooping in on Cabletron. Alcatel, after all, recently acquired gigabit network player Packet Engines, as well as Xylan, the fast growing provider of local network products.
It is more of a stretch imagining Cabletron fitting into the plans of the other acquisitive European superpower, Siemens AG. Just last month, Siemens formed a U.S. company, called Unisphere Solutions, to chase IP dollars.
Unisphere Solutions, which is said to represent an initial $1 billion investment by Siemens, will combine existing units of Siemens Information and Communication Networks U.S. with the newly acquired assets of Argon Networks (which makes an integrated IP routing/ATM switching platform) and Castle Networks (which makes central office gear that bridges circuit and packet environments). The company has also taken an equity stake in Accelerated Networks (a provider of integrated access tools).
Analyzing the acquisitions of the overseas giants, it is clear Siemens is looking primarily at the carrier market, whereas Alcatel is trying to bolster its enterprise portfolio.
In that regard, Siemens' strategy is similar to Lucent's, and Alcatel's is closer to Nortel's. Lucent, after all, is acquiring Ascend to strengthen its position in ATM/IP carrier-class equipment, while Nortel's Bay acquisition gave it entry to enterprise accounts.
And, believe it or not, the relative small fry that has all these giants running scared and seeking partners is none other than Cisco. The justifiable fear is that all the circuit-switched carriers now beginning to chant about cells and packets will turn to Cisco when it comes time to upgrade their infrastructures.
And chanting they are. As noted, AT&T recently announced it will stop buying circuit-switched central office gear by year-end. And MCI WorldCom, Sprint, Qwest and the rest are all talking up a future based on ATM and IP.
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