In-Depth

An End to the Bandwidth Glut?

Is a resurgence of big-ticket capital expenditures for infrastructure ahead?

• By Stephen Swoyer
• 02/17/2004

For starters, two of the biggest players in the business, Cisco Systems Inc. and Juniper Networks Inc, both recently recorded earnings that—while not quite harkening back to the glory days of the once-high-flying networking sector—are nevertheless encouraging.

Cisco, for example, recently posted a profit of $1.29 billion for the fiscal second quarter (which ended January 24), marking a 30 percent increase in year-over-year earnings. Juniper posted a profit of $15 million on revenue of $207 million for the fourth quarter of 2003, which ended December 31. That represented an increase of about 75 percent over Juniper’s year-ago totals.

During a conference call with reporters and analysts, Cisco CEO John Chambers sounded a cautiously upbeat tone. “We are continuing to see a number of signs that could be interpreted, with the appropriate caveat, as optimistic,” he said, noting that Cisco recorded sequential revenue growth of 6 percent from Q1 to Q1 for the first time “in a long, long time.”

A Long Time Coming

Some analysts have been predicting a recovery of this kind since late last year, but almost no one expects a return to the additional-capacity-at-all-costs buying frenzies of the late 1990’s. After all, argues Joe McGarvey, a senior analyst in carrier infrastructure with Current Analysis Inc., high-end customers are confronted with a different situation today than they were four years ago.

McGarvey says Cisco and Juniper—which have been slow to implement Multiprotocol Label Switching (MPLS) and other next-generation services into their high-end routers (such as Cisco’s 12000 Series line)—are under attack from a scrappy band of start-up challengers. These vendors—Avici Systems Inc., Caspian Network, Chiaro Networks, Hyperchip, and Pocket Networks, among others—claim they, not Cisco or Juniper, are providing infrastructure devices that are better equipped to support different types of MPLS traffic, protocols, and services.

“The decision before most service providers is whether to use the routers (largely from Juniper and Cisco) which they used for the last build out, or to move to a newer breed of routers—those that have purportedly been designed to accommodate the future need for growth, reliability, and QoS performance,” McGarvey writes. “The argument from Avici and the newcomers is basically that the networks carriers and service providers now need to build look nothing like existing networks—so why use existing equipment?”

In this regard, McGarvey and Current Analysis believe that timing, more than anything else, is on Cisco’s side.

“If it were 1999 instead of 2004, service providers might be more willing to take a risk on a new startup or take on the expense of burning a new box into their infrastructure,” he observes. “As it is, though, service providers and carriers must undertake the next cycle of expansion under the careful watch of their CFO, management team, and shareholders. Flights of fancy that resemble 1999 will be hard to find this time around.”

Enterprise in Play

Service providers aren’t the only customers looking to build out their infrastructures and increase their capacities. Last week, Juniper let it be known that the enterprise is in play—big time—when it spent $4 billion to purchase NetScreen Technologies Inc., a manufacturer of hardware-based VPN and firewall products. Juniper has historically done the lion’s share of its business—anywhere from 75 to 95 percent, depending on who’s counting—with service providers, but NetScreen is just the opposite, with as much as 75 percent of its revenue coming from enterprise customers.

Cisco does as much as three-quarters of its business in the enterprise. Why so much interest in an enterprise networking space that has—to put it kindly—performed anemically over the past three years? During Cisco’s earnings conference call with analysts and reporters, Chambers confirmed that he has received encouraging feedback from enterprise decision-makers, who are more optimistic about the prospects of a lasting economic recovery.

“Now most of the CEOs in the U.S. and around the world are slowly increasing their optimism of the global economic recovery. While this momentum, clearly, isn’t as strong as we would like, this is the second quarter in a row that we’ve seen positive year-over-year increases,” he said. Chambers concedes that “CEOs are still more cautious than I would expect at this stage of the recovery in their spending and hiring."

Among other encouraging signs, Chambers cited the strong performance of Cisco’s professional services arm, which accounted for 16 percent, or $848 million, of revenue during Q2. Another strong point was sales of high-end routers: Chambers said that revenue growth for Cisco’s 12000 series routers had increased by “almost 100 percent sequentially” over Q1 2004. He speculated that Cisco’s revenues will rise by one to three percent in Q3.