When there are articles coming out that say that network vendors are having not only a bad year but a bad decade, you have to believe something just might be wrong. Of course, it is, and most of Wall Street believes that Cisco’s quarter was a pretty solid indicator of the problems that vendors are now facing. Earnings calls are as much propaganda as companies can make them without generating regulatory risk, but we can perhaps read between Cisco’s lines to get a bigger picture. The net of the call, IMHO, was positive quarter, negative guidance, but it’s the reason behind the combination that has the Street worried.
According to Cisco, enterprises had been constrained in deploying products they needed and ordered, because of supply chain impacts on production that created delivery delays. The resulting backlog, again according to Cisco, has been cleared. They describe it thus; “After three quarters of exceptionally strong product delivery, our customers are now focused on installing and implementing these unprecedented levels of products. The bottleneck that we previously saw in the supply chain has now shifted downstream to implementation by our customers and partners.” In short, budgeted equipment has largely been delivered, and until more budget comes along, orders will likely be slow. The call said that Cisco’s fiscal Q1 (calendar Q3) orders were off 20%.
The notion that buyers’ ability to post new orders is determined by the pace at which they can absorb the old doesn’t match what buyers tell me. In fact none of the 88 operators I talked with in the last year even raised that point. Cisco’s comments assume that there’s a consistent flow of orders, justified by some consistent budget. From their perspective, it’s all about budget inconsistency. They order stuff when they have the budget to pay for it, and when they use the budget up, orders stop until more budget is available. That happens when there’s a business case to justify the budget increase. Yes, there is some orderly modernization budgeting that will likely come into play in the next quarter, and impact the second quarter of 2024 (Cisco’s Q4), but any major changes are going to require a specific project. My data has shown that project budgets for enterprises have been declining for decades.
Where does Cisco think new orders will come from? AI (of course), software (Splunk), security, and across it all a determined goal of increasing subscription revenues. It won’t be coming from service provider or cloud provider buyers as both those areas slowed. Enterprise sales dipped too, but less than the provider space did.
My Wall Street friends are also skeptical that Cisco’s “customers are absorbing backlogged shipments and will spend their little hearts out when they get through that stage” story is realistic, but they’re not prepared to cry foul on that story. Under the covers in networking, there is a systemic problem with demand, but it’s hard to get that kind of viewpoint from the Street or from sales and partner people. Both groups have a vested interest in the view that Happy Days will be Here Again. That’s why you don’t get a lot of pushback on the Cisco theme.
You may recall from my blogs last week that I wasn’t seeing a lot of buyer confidence in calendar 2024 overall, and that even for 2025 there is some reason to believe that buyers are hopeful but not convinced. I have a similar view of the market myself; I think that the network space is going through a period of adjustment, created by the end of easy budgets, the hype of 5G being recognized, and the difficulty in aligning the stakeholders for a broad advance in buyer business cases. I don’t think there’s any chance that all this will gel in 2024, but I think it’s likely to in 2025, perhaps created by a major player like Cisco, IBM, or Broadcom/VMware. It’s going to be a risk to step up and admit that we have to do tech differently overall to make tech more valuable overall, and the players most likely to take that risk are the ones who can pull the essential pieces into their own product story. Biggest rewards justify biggest risks.
Sometimes the biggest rewards don’t come to the major, key-market, players. In fact, the opportunities to see major gains in market share almost never come in an evolution-driven environment. Buyers looking for something new and radical are much more likely to switch vendors than buyers simply filling up the corners of their network plans. The trick is to get them to look for that radical new something, and to make that happen is going to be tricky, in no small part because of Cisco.
Cisco is the network incumbent. Their stock had been on a steady uptick from early May through roughly mid-September, doing better relative to arch-rival Juniper for example. Cisco has always been smart in staffing initiatives aimed at transforming networks and services, and often their goal has been to slow progress to protect their own incumbency. That’s not a criticism; it pays to hold on to what you have, if you have most of the goodies. They have enormous influence in the network space because they have perhaps the best sales account control in all the industry. If they buck initiatives to change the network market universe, it will take considerable effort to overcome their influence. Maybe so much that nobody will try, which as an incumbent Cisco would surely not mind.
That doesn’t mean that Cisco doesn’t see where the wind is blowing. The Splunk acquisition would certainly give Cisco a way of building an overall network and IT management strategy that’s framed around observability, and that (as I said in a prior blog) is a better way of getting AI into the management game. But if there’s ever been a network transformation that exploded out of a management starting gate, I sure don’t remember it. Splunk, then, isn’t likely to be the first step in a broad Cisco re-framing of strategy. That would then suggest that Cisco is still more evolution than revolution, but perhaps holding the belief that natural market selection might be accelerating a bit, and that management could evolve into something bigger when Cisco’s ready to do some M&A to support that shift.
Getting past the normal market resistance to change, and battering incumbent giants’ influence along the way, can’t be accomplished except through mighty marketing. Transformational education isn’t a role you can assign to sales people; they need to be selling and making quota. Marketing, these days, is almost an extension of sales, and it shouldn’t be that at all.
New stuff means getting people’s attention, which means impressing your message on their eyeballs. The thing that gets buyers looking and thinking is really media buzz, and that’s what marketing is supposed to be good at. This is particularly true when a new network and service strategy might involve, in building the business case, a different cast of characters than the sales force normally engages with. An up-and-coming player would likely find media engagement here easier, since their move would be more newsworthy and click-generating.
Of course, all of this could have been done several years ago, and had it been done I think that a second-tier player would now be calling a lot of shots. That nothing has happened means that nothing might happen. Cisco, determined to be either a soft-revolution evolutionary or a soft-evolution revolutionary player, could be right about where things are going by default; a soft hand is sometimes best. Especially when we don’t know for sure whether evolution or revolution will win, or which will even be survivable.
