Cisco beat estimates in its quarter, coming in about where I’d suggested it might overall. The Street is happy with the results, which they should be, and the question now is how the details of Cisco’s performance might signal us toward a view of the next year.
I think one key statement from the call, from now-CEO Robbins, was “When I think about our strategy, I look at the huge market opportunity that exists as businesses and governments use technology to drive their growth and operational efficiency.” Productivity is the measure of operational efficiency for enterprises, and was the driver of all the past IT spending booms. Operations efficiency is the most credible benefit target for network operators. So the question is whether Cisco is now recognizing this, or whether it was just a catchy turn of the phrase inserted by a speech-writer.
Overall revenue growth was 4%, but switching and routing both under-performed versus the average and data center (UCS) was the big success with 14% growth. This suggests, as I noted yesterday, that neither the network operators nor the enterprises were confidently re-investing in the current (Ethernet/IP) model of networking, but also that they were not seeing enough of a credible alternative emerging to dampen normal refresh. There may be some extending of product lifecycles, but it’s not excessive.
The service provider segment did return to growth for Cisco, which again isn’t any real surprise. Had SDN and NFV adoption been where you’d think they are based on media coverage, we would have seen a distinct slip in Cisco’s numbers given that they are hardly a leader in either space. There was no such slip, which proves that we’re not seeing any impact of SDN or NFV on infrastructure spending by operators.
Robbins said that Cisco “did really well in the core” regarding routing sales. That suggests to me that the place where Cisco is strongest in the network operator segment is one of the places operators are trying to re-architect the most. The replacement of large routers with agile optics or SDN-groomed tunnels is a major priority. They aren’t seeing any hurt from this shift, so clearly it’s not yet happening.
NFV was mentioned on this call by Cisco for what I think was the first time. Their comment: “But I do think that as we look at where the service providers are going, what they want to do with virtual managed services, how we’re aligned now around the deployment of NFV and how we move forward with that, we think that we’re well positioned with routing as we look ahead.” Given that NFV really doesn’t have much to do with routing specifically, and that virtual managed services (service chaining) are a fairly limited NFV application, I think it’s fair to say that Cisco has no revolutionary NFV intent.
Enterprise/commercial carried the day in terms of segment performance, and routing slightly out-gained switching. I think that suggests that my comments regarding the pace of SDN in the enterprise (in my blog on Arista) were correct. Enterprises are more likely to be tied to their incumbent vendor in complex technology like routing, and so Cisco picked up more there. Switching is more competitive for the simple reason that there are fewer features.
One very significant point here is that Cisco is retaining a strong data center account control lead, based on my own interactions with enterprises. For the last eight years, data center networking needs and policies have driven network equipment and architecture decisions, and that drive has been decisive in the last four years. The vendor who used to have absolute control over the data center was IBM, but Cisco is now in the top spot.
Cisco, in fact, listed achievements in the cloud data center and in software as its two primary goals. Given that it’s already dominating data center strategic influence at least in the US and Europe, it seems reasonable that it would be able to achieve at least that first goal. However, Cisco’s cloud aspirations seem more tactical than strategic. They don’t talk about differentiating themselves with cloud technology, but about exploiting the opportunity for data center equipment that the cloud creates. Surprisingly, they ignore the biggest potential source of new data centers, which is NFV.
Not everything is good news. If I were Cisco I’d be concerned about the fact that its growth came completely from the Americas, meaning the US and Canada. The reason this is important is that Cisco’s account control is greatest in these markets, and competition (particularly from Huawei in the network operator segment) is lower or absent. Europe, of course, is mired in secular economic issues and its underperformance has hurt Cisco’s numbers because Cisco enjoys account control there almost as much as here.
Software looks to be a bit knotty. If you read through the call transcript the vision you get is one of a Cisco who sees software purely as a means of transitioning to a subscription/recurring revenue model in areas like security. There is no sense that software technology is now driving the bus completely. This isn’t a problem limited to Cisco, though. Arch-rivals Alcatel-Lucent and Juniper are also locked in the box, so to speak, and are having difficulties coming to terms with a pure software future where hardware is just what you run software on.
So what can we say about the call overall? First, while Cisco may have opened with that operations efficiency comment, I think it was an accidental fluffery and not a signal that Cisco recognizes the importance of driving IT and network spending growth by harnessing productivity and operations efficiency as benefits. There were no comments made later on to tie to the efficiency theme, and Cisco likes to leave a trail of bread crumbs when they want us to follow.
Second, Cisco is telling us that neither SDN nor NFV are impacting sales at all. That’s not as much a fault of the technological merits of either as to the vacuous positioning of offerings and the insipid dealing with key value propositions. It’s not smart for Cisco to defend against SDN or NFV when nobody is attacking effectively with either technology. In fact, Cisco paints a picture of real risk of failure for both technologies. If nothing is done in the next two years to radically change buyer thinking, the reinvestment in legacy technology will have nailed a lot of buyers to the ground for three or four more years, and by then there’d be little chance either SDN or NFV would develop any real momentum.
Cisco is doing well, in no small part because it’s winning the old game and too smart to support a new one. Those who want to see Cisco drop market share or want to displace Cisco at the top of the heap will have to sing and dance a lot better, and start that process very quickly.
