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Cisco Stagnates
Chris Kraeuter, 12.02.05, 6:00 AM ET

BURLINGAME, CALIF. - Cisco Systems may dominate the networking industry, and it may have some of the most enviable profit margins in the technology sector. But it also has a stock price that's been stuck in the doldrums for a year now.

The world's largest networking company will trot out its top executives next week in front of roughly 400 investment and industry analysts for two days of presentations, tours and evangelizing.

Last year's analysts' meeting provided hardly any boost to the stock, with shares bouncing around since then, trading between $17 and $20.

Shares closed Nov. 30 at $17.54, part of yet another mini-rally, this one stemming from Cisco's (nasdaq: CSCO - news - people ) $6.9 billion purchase of Scientific-Atlanta (nyse: SFA - news - people ) two weeks ago.

The deal offered bulls hope that the company is still capable of growing, but Scientific-Atlanta's numbers indicate that it won't add much to Cisco. The set-top-box maker sports sales growth of around 10%, similar to Cisco's, and its profit margins are in the high 30% range, well below Cisco's margins in the high 60s.

As is the case of so much in the technology world, the deal's real promise lies in the future. Cisco reached out of its networking niche to buy Scientific-Atlanta, looking to better position itself as a broader provider of products and services to cable operators.

Cisco wants to provide all things networking to business and home, and it sees its ability to integrate a wide array of products as pivotal to its future success. This is a strategy that builds on the company's already substantial size but doesn't necessarily spur the rapid growth that investors want to see.

To this end, Cisco touts its so-called "advanced technologies," which are business areas that the company predicts can eventually account for $1 billion in annual sales.

Since these businesses are but small pieces of the overall company, their growth rates are faster. Sales of Cisco's six advanced technologies rose 25% in the previous quarter. Still, this segment makes up under 20% of Cisco's overall sales.

Another area of concern for investors is the company's international penetration. Cisco is able to draw only 17% of its sales from Asia-Pacific, including Japan--a level that's held steady for the past two years. North America accounts for more than half of Cisco's sales.

Order growth in Asia-Pacific came up strong in the most recent quarter, hitting 30%, a level that hadn't been reached in the previous four periods.

Altogether, Cisco is a company that has become a victim of its own success. It dominates the networking market, so there is little left there for the company to capture. It is branching out into new but related areas via its advanced technologies, but those segments remain moderate contributors to the overall business.

Bill Lesieur, a director at Technology Business Research, says Cisco has done pretty well with bringing along its advanced technologies, though sparking faster growth remains the key issue facing the company. "Everyone is just staring at the growth guidance," he says.

Indeed. That was a major topic at last year's analysts' meeting, and it will remain a major topic until the company can prove otherwise. The stock's inability to sustain a rally reflects growth fears.

Cisco wants to do bigger things than sell networking hardware. Its purchase of Scientific-Atlanta proves that, and Lesieur notes that the company is trying to do more with professional services.

"Cisco very much wants to influence the IT buyers, all the way up to the CEO level," he says. "They want to own more and more of the data center."

While this could have major implications for business in the years ahead, investors remain skeptical. Cisco aims to give them more to believe in during next week's analysts' meeting.

http://www.forbes.com/2005/12/01/cisco-shares-stagnation-cx_ck_1202cisco.html?partner=daily_newslett...

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