Two networking companies are raiding one another's markets, and that could spell tighter profit margins, and tougher going in the stock market, for both companies.
(CSCO:Nasdaq), whose "router" devices relay 80% of the traffic on the Internet, has pioneered and dominated that aspect of the networking market. Pressing from the other end is
(CSCC:Nasdaq), which makes switches for Internet service providers. With networking-equipment technology improving, Cascade and Cisco find themselves moving into each other's domain.
For several years Cisco, which boasted $1.43 billion in revenue for the quarter ended Oct. 31, has specialized in building "intelligent" but sometimes slow routers. These routers receive data messages and decide where to send them on the network. Meanwhile Cascade manufactures less intelligent, but speedier switches that blast data bits through a single path.
Now the lines have started to blur. In the first half of 1997 Cisco will ship its first "tag-switching" products, which make routers faster and switches a little smarter. In the same time period Cascade will release its first "IP Navigator" software upgrades, which add intelligent functions to its already quick network switches.
The technologies "are different methods of skinning the same cat," says Jennifer Pigg, vice president, data communications, at the
. Though tooth-and-nail brawling isn't imminent, Pigg expects a bruising rivalry between the two firms to evolve in the coming year.
Adding to the intensifying mix of firms fighting for a piece of the growing network-equipment pie, many large companies have started adding products to compete with routers, hubs and switch makers. For example,
is expanding the reach of Windows NT software to include router services for corporate customers.
"What Cisco is trying to do is to get an overwhelming advantage over Cascade," says Brendan Hannigan, senior analyst at
. But he does not anticipate a knockout punch: "There's no way Cisco is going to roll over Cascade."
While excited about the swelling business of Internet hardware, investors are becoming increasingly skittish about the rising competition. On Wednesday, Cascade rose 5 to 66 7/8 on the heels of a positive rating upgrade from
. That surge came after Tuesday's plunge, when Cascade dropped 6 5/8 to 61 7/8 on news of a big contract loss.
Today shares of both companies calmed somewhat, falling with the broader market. Cisco closed at 65 +, down 2 +, and Cascade fell 7/8 to 66. Despite the looming competition, the two companies still sport high valuations, at least by traditional measures. Cisco trades at about 42 times trailing 12 months earnings and Cascade trades at roughly 115 times the trailing 12 months earnings.
Adding to the nascent Cisco-Cascade rivalry is an apparent failed bid by Cisco to purchase Cascade. In the fall of 1995 Cisco built a 6% position in Cascade, and Wall Street anticipated a takeover. But none occurred, and since then Cisco has sold its investment in the smaller concern.
A month after the takeover deal fell through, Cisco announced plans to purchase
, a Cascade competitor. That $4.5 billion stock swap was finalized July 10.
For the quarter ended Oct. 31, Cisco reported net income of $180.9 million, or 26 cents per share, a slight drop from $181.3 million or 28 cents per share one year earlier. In the same period revenue surged from $798.3 million to $1.43 billion.
In the quarter ended Sept. 28 Cascade boasted a net income of $20.3 million, or 21 cents a share, a rise from $6.8 million or 7 cents a share one year earlier. Revenue was $94.2 million, up from $36 million.
Cascade declined to comment on the market rivalry. Cisco said it was "confident" it could maintain its market dominance.
By Kevin Petrie