Customer loyalty still paying off for Cisco
By Scott Lanman
Bloomberg News Service
SAN JOSE, Calif. — Jon Snyder, who helps run the computer network at Portland State University, knows he could save the Oregon school as much as $75,000 by not shopping at Cisco Systems Inc. for equipment he'll buy this year.
Hewlett-Packard Co., Foundry Networks Inc. and Extreme Networks Inc. charge less for similar products. That doesn't tempt Snyder. He says he plans to spend $100,000 to $250,000 at Cisco, the biggest maker of networking gear, because he prefers the company's equipment and customer service.
"You get what you pay for," Snyder says. "One outage caused by a software bug that Cisco wouldn't have is worth the price difference."
Banking on that kind of brand loyalty, Cisco Chief Executive Officer John Chambers has stuck with prices that are often 50 percent higher than what competitors charge. While sales of network equipment fell industrywide to a four-year low in 2002, Cisco's gross margin widened in every quarter and to a company record 70.4 percent in its second quarter ended Jan. 25.
Chambers' strategy is paying off with profit. San Jose, Calif.-based Cisco said last week fiscal second-quarter net income rose 50 percent to a record $991 million, or 14 cents a share, from $660 million, or 9 cents, in the year-earlier period. Sales fell 2.1 percent to $4.71 billion from $4.82 billion. The gross margin, or percentage of sales left after subtracting production costs, was 62 percent in the year-ago quarter.
"They own the market and they can still afford to charge the premium for the nameplate," said Terrence Gerlich, who manages $500 million at Freedom Capital Management LLC. Freedom held 423,090 Cisco shares as of Sept. 30.
Cisco had a 69 percent share of network-switch revenue in the third quarter, according to market researcher Dell'Oro Group.
While the company still has a market value of almost $100 billion, its stock has dropped 28 percent in the past year. That compares with a 22 percent gain for Foundry and a 65 percent decline for Extreme.
Chambers, a 53-year-old West Virginia native, began his ninth year at Cisco's helm on Friday.
