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Cisco partners optimistic despite Wall Street downgrades

Wall Street has downgraded Cisco shares, but Cisco partners look to the long-term and say data center products are not an area of discretionary spending.

Wall Street seemed unaware of the whirlwind of glowing product launches and new service offerings coming out of the Cisco Partner Summit 2008 in Honolulu last week.

Despite big news of potentially disruptive data center technology and a Linux-based application server that could turn the unified communications (UC) world on its ear, Cisco was downgraded by a Wall Street analyst -- for the second time in two weeks -- and shares slid nearly 3%. Cisco's shares traded at $23.37 at the time of publication.

While noting a weak economy and its inevitable effect on tech companies, company executives and Cisco partners do not believe that Wall Street downgrades and predicted soft sales will hurt their long-term goals.

"The announcements that Cisco is making are for long-term sustainable business practices," said Tim Hebert, CEO of Cisco partner Atrion Networking Corp. in Warwick, R.I., adding that data center consolidation can take three to five years. "Consolidation doesn't happen overnight. … We don't think quarter to quarter."

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He also noted that Cisco offers hardware and services that can't be ignored, even in a rough economy. Hebert described one customer that hired Atrion to replace its 25-year-old phone system with Cisco equipment.

Downgrades hurt Cisco shares

Whether predictions are short- or long-term is yet to be seen. On April 3, UBS analyst Nikos Theodosopoulos lowered his rating on the company to "neutral" from "buy," immediately sending Cisco's shares down to $24.31. The following Monday, April 7, J.P. Morgan Securities cut its revenue growth estimates for Cisco, projecting revenue to grow only 10% in fiscal 2009 compared with the previously forecasted 15%. The brokerage lowered Cisco to a neutral rating. By the following Tuesday, April 8, Cisco stocks were down to $23.75.

J.P. Morgan pointed to an overall slowdown in the U.S. economy, expected lower spending on technology and smaller deal sizes as the reasons for the lowered expectations, Reuters reported. UBS's Theodosopoulos wrote that his research showed technology orders are slowing in the U.S. and weakening in Europe as well.

During a call hosted by Goldman Sachs immediately after UBS downgraded the company, Robert Lloyd, Cisco's senior vice president for the U.S., Canada and Japan, said the company would remain cautious, but he added that because of continued demand growth in key market segments, including video and other Internet applications, Cisco would not lower equipment prices.

During the webcast announcing Cisco's new Ethernet switch and data center strategy, execs briefly addressed reporters' questions about how the new technology would fare during a recession. Doug Gourlay, Cisco's senior director for data center products, said that data center technology is "not an area of discretionary spending" and therefore would not be affected by macroeconomic trends.

Robert Keblusek, senior vice president of business development at Sentinel Technologies in Downers Grove, Ill., agreed with Hebert that customers are taking longer to make purchasing decisions. Yet while Hebert reports robust sales, Keblusek has seen signs of a slowdown. However, he said there are approaches partners can take to battle a rough economy.

"There is some sense of decreasing activity. People are taking a conservative approach," Keblusek said. "The good thing for us is there is still demand. We also have services and support, so if they are not buying, they will need support on their existing systems."

Keblusek added that products that have a strong return on investment (ROI), like UC, would continue to sell despite the economy.

"What happens when the economy gets off like this is customers ask, 'What is my ROI?' I can spend if I'm going to save next year, not in five years," he said.

Meanwhile, Cisco is not alone in its Wall Street woes. Networking solutions manufacturer Foundry Networks Inc. reported first-quarter earnings Friday that were higher than the same quarter last year, but fell below Wall Street expectations. Foundry execs said during the earnings announcement that the company experienced customer delay in purchasing decisions. Neither Juniper Networks nor Nortel Networks is expected to meet Wall Street expectations. Both companies will report in the next two weeks. Cisco's next earnings call will be May 6.

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