Cisco’s quarterly earnings call was in one sense a far cry from the previous one, but it was still not exactly a return to the glory days when everyone wanted to be “the next Cisco”. The company narrowly beat estimates and it guided to 1% to 4% growth for the current quarter. It’s this guidance that likely helped boost Cisco’s shares in after- and pre-market trading; other networking companies have been guiding downward.
Views on what all of this might mean are mixed. You can start with the fact that some Street analysts believe that Cisco won’t meet its guidance, particularly given the increased economic threat globally. Of course, you can always blame macro-economic conditions when you don’t make your numbers, so that risk probably wouldn’t deter Cisco’s issuing a more rosy forecast if it felt it had some assets in play, so it’s safe to assume that’s what they think.
They do, of course. Number one on the list is incumbency. Nobody can unseat an incumbent in a commoditizing market except a price leader. Because network equipment vendors have let their market commoditize, Cisco’s position and market share are safe as long as the company discounts enough to stave off competition. That’s likely to be easier for Cisco in the enterprise space because the Cisco brand is strongest there and competitors like Huawei are weakest. If you look at Cisco margins you see some erosion, though not as much as the Street had feared. And Cisco is coming into the second calendar half, when hold-back spending of budgeted funds could still buoy their sales. Incumbents benefit most from this end-of-year impact because they can draw on both project and departmental update dollars; competitors typically have to chase the project budgets that are more likely to be suspended in bad economic times.
One thing this quarter suggests is that Chambers, who the Street had widely believed would exit Cisco around the end of the year, may not be in that much of a hurry. The company can still hope to regain some of its Street luster if it can cut costs significantly and essentially accept that it’s going to spend the rest of its corporate life in price wars with Asian competitors in the service provider space and account control wars with IBM and HP in the enterprise.
What do I think? First, I don’t think that Cisco can become a networking commodity-market leader, and certainly not under Chambers. They need to be a growth company, which means they have to figure out how to grow. Nothing they’ve done so far is compelling; the company tells carriers that they need to carry more traffic no matter how unprofitable it is, and the tell enterprises that servers made by Cisco link to the network better despite the fact that servers from every source have linked to the network all along. So their future still depends on coming up with something compelling.
In the enterprise space, Cisco is actually doing better than their numbers might suggest at first blush. If you discount the public-sector components that are clearly in trouble now and for the foreseeable future because of budget cuts, they grew switching by about 13% in a market where competitors saw a lot of softness. Our enterprise contacts say that Cisco has been stronger than expected in the data center, which is the key place to be strong for any network player because it’s the place where the network meets the worker. It’s that meeting that Cisco must consider now, not just in the tactical sales sense but in the strategic sense.
Cisco is at a crossroads. Down one path, they can re-invent networking. They can do that only by creating a coherent vision of the network as a software platform, and that’s the inside message of the cloud. Down the other path, they can re-invent themselves. That can’t make them into the Cisco of old because that can never be in the network equipment market again; not for Cisco or anyone. What Cisco can become is HP, a full-service IT giant. They have the pieces. And I hope you can see that in terms of execution, these choices are the same. The cloud is IT plus networking.
Of course, if Cisco wants to define “networkware” for the future, they have competition there too. For now, that competition is vulnerable. Alcatel-Lucent has been talking their Open API and Application Enablement stuff, but their story is really aimed at the service provider space only and they’ve not baked their own architecture well enough to communicate it even to those providers. Juniper has been talking about a Junos ecosystem, but their execution has narrowed the “ecosystem” down to meaning nothing more than network transport and connection behavior, which is no ecosystem at all. Neither company has a cloud story, neither has an enterprise story for their networkware either.
So Chambers has renewed his lease for a bit, but what that means is that he’s going to have to clean house at the senior management level to transform Cisco into either a computer company or a networkware visionary. And he has to do it quickly, because even incumbency and discounting won’t work forever.
