Cisco Systems sales to North American cable operators fell 35% year-over-year in the quarter ended Oct. 30, 2010, with the networking giant blaming the drop on lower spending by MSOs on set-top boxes as well as competition from lower-cost competitors.
Cisco chairman and CEO John Chambers, on a conference call with analysts Wednesday, said orders to U.S. telcos including AT&T and Verizon grew 20% in the quarter.
Cable sales, by contrast, were down significantly. Specifically, Cisco's traditional set-top business -- which represents $2 billion in annual sales -- fell 40% among North American cable operators in the period. About half of the company's set-top orders in the quarter were from North American MSOs.
Cisco's cable business "is under pressure as new housing and consumer spending slows, as lower-cost competitors begin to enter the market," Chambers told analysts. "As a result, we are seeing year-over-year declines in orders and we expect to see continued pressure, specifically in our traditional North American cable business."
In midday trading Thursday, Cisco shares were down 15%, to about $20.77 per share, from the prior day's closing price. Analysts cited Cisco's weak revenue forecast among public-sector customers and cable operators for the decline.
The largest beneficiary of Cisco's lower cable sales is likely to be Time Warner Cable, according to Sanford Bernstein senior analyst Craig Moffett.
"[W]e may (finally) be seeing the beginning of the end of the [set-top box] duopoly" of Cisco and Motorola, Moffett wrote in a research note.
With the Federal Communications Commission's CableCard mandate, MSOs had greater flexibility to source boxes from alternate suppliers, he noted. "Initially, MSOs continued to buy CableCard boxes from their traditional suppliers Cisco and Motorola, and the cost of boxes rose instead of fell. But the option to source boxes from lower cost Asian suppliers was finally there. We may finally be seeing the long (long) awaited transition," Moffett said.
About 80% of Time Warner Cable's footprint is Cisco-based. In the third quarter of 2010, TWC's customer premises equipment spending dropped 9%, or $26 million, from the year-prior period. "That's a big drop, but not nearly enough to explain all (or even most) of Cisco's shortfall," Moffett noted. "We must also be observing share shifts."
Cable operators have traditionally accounted for approximately 35% of Cisco's North American service provider business. Chambers added that the company is seeing strength in its international cable set-top business and IPTV set-tops. "We are comfortable with the business momentum of cable set-tops outside North America and we are pleased to see the continued growing footprint of the IP set-top boxes," Chambers said.
With MSOs in a transition to IP set-tops, Cisco is facing a lot of new competitors, Chambers also said. "That is a market transition and I would say where we are two to three years from now was how well we caught that transition or not, not what we did in the given quarter," he said on the call.
Cisco does not break out specific financial results by business unit.
Overall, Cisco sales increased 19% in the period over last year, to $10.75 billion, while net income was up 8%, to $1.9 billion.
Cisco earlier this summer appointed Enrique Rodriguez, previously in charge of Microsoft's TV, video and music business unit, as senior vice president and general manager the Service Provider Video Technology Group. In an interview with Multichannel News in September, he emphasized that he has been focused on the cable industry's transition to IP video and adoption of Web technologies.
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