Cisco messed up. That’s the conclusion of Wall Street, and at one level I agree. According to an analyst quoted in the article I’ve referenced, “management overestimated that demand would return in F2H24, when the reality is we are in a networking downcycle ex-AI investments.” That’s true, and it’s the level I agree on. The level I don’t is that buyers themselves were telling me that they were doing a second budget to account for the possibility of an uptick in business, even in early January of this year. They were optimistic, and they were wrong to be that.
OK, everyone is wrong sometimes, you say, and that’s correct too. I’m not going to focus on the fact that mistakes were made (perhaps because I made them too). I want to focus on why, and that’s important because there’s an implication in that “management overestimated” quote, and it’s probably wrong even if the impact is correct.
Cisco, Reuters, and Piper Sandler (the analyst firm) almost surely believe (or at least say they believe) that the problem Cisco had was one of timing and not of change per se. The demand will return, they think, but a little later than expected because interest rates and inflation are holding higher, longer. If these macro issues are actually the problem here, then the view is very possibly correct, even though some major economies (the UK and Japan) dipped into recession at the end of 2023. If macro isn’t it, then we have to find another force at work, and then decide when the issues that force creates will fade.
When companies are faced with a quarter that doesn’t meet Street estimates, their instincts are to give a reason least threatening to their stock price. Things are temporarily a bit softer than we expected but they’ll come out in the end. To quote the song “Cool Water”, “Dan can you see that big green tree Where the water’s runnin’ free And it’s waiting there for you and me….” Certainly right now there’s even a reason to say that the quarterly softness could be attributed to macro-economic conditions, but it would be better to say “influenced”.
Tech has generally done fairly well in soft economic times. In the three major tech cycles we’ve had since the computer age got going, businesses drove tech investments up faster than GDP growth throughout the cycle. Tech recovered better and faster than the broad economy during COVID. Yes, interest rates can impact spending, but if tech were to fulfill its natural role of improving productivity, you’d expect to see spending on tech climb to reduce costs elsewhere. But as I’ve pointed out, the kinds of projects that have improved productivity and spurred tech spending growth in the past have been slipping away.
The same stories that lament Cisco’s performance still managed to work AI into the mix. The article I cited is titled “Cisco’s AI push in focus as shares fall on tepid networking gear demand”. It points out that Cisco said it had three times the value of AI-related deals in the pipeline as they did a quarter ago. Well, maybe, but how much of that is because other companies have AI-washed everything, just as Cisco was doing with their comment? Cisco, remember, did an NVIDIA marketing deal but it’s really not on the leading edge of AI adoption, and you don’t need to network AI technology you don’t install because you don’t understand the AI business case. Can Cisco make buyers understand? I doubt it.
The article does mention the deal Cisco is really counting on, which is the Splunk acquisition. Cisco spent twice as much for Splunk as HPE spent for Juniper. That’s real money, so Cisco is making a real bet there. The reason is that security is about the only thing enterprises say they’re dependably spending more on. Security is really the “big green tree” that Dan’s supposed to be viewing, more so than AI, which is just a nod to the hype. Cisco can use security, use Splunk, to gain some relief from Street pressure while the market for network gear stabilizes and improves.
If it does. Does anyone think that the telco sector, the sector Cisco cited when it said it had “rolled out job cuts as it battles sluggish demand from telcos and cable service providers” is sluggish because of macro-economic downturns? How long has that been going on? Fact: Service provider revenue is stagnant. Fact: Service provider profits are stagnant. Fact: So they’ll spend more? Not fact, not even logical. Every single operator is trying to spend less, and if you recall my comments on what the other enterprise verticals have been telling me, the great majority of enterprises are doing the same thing. The problem Cisco has is that a delaying action only works if there’s an end to the reason a delay is necessary. That’s the problem everyone has, or almost everyone.
This is why I’m watching IBM, watching HPE, watching Apple, watching Nokia, and even Broadcom. What’s needed now for network vendors, for tech vendors overall, and maybe for the whole global economy, is someone to create an ecosystem broad enough to make a new demand-supply connection. Somebody who can get all the way from Point A to Point B instead of hunkering down on the finish line with a camera and hoping someone else fires the starting pistol. IBM has enough tools and engagement to move the market alone. Apple has the marketing smarts and the ability to attract partners. Nokia is actually cobbling together the right pieces, even if they’re not exactly the right player type to do it. HPE and Broadcom both made or are making acquisitions that give them ecosystemic breadth, not unlike IBM, if they play things right.
Nobody is going to take the time, expend the effort, and throw the money, needed to launch a new tech age if most of the benefit will fall to others. They’ll want to win big to justify playing big. The bigger that gap from A to B, the longer that big win will take and the more problematic even getting there will be. That means the smaller the chance a player would even try it. A player like Cisco.
This is going to be a big test for Cisco. Their sales-centricity has been a major asset for the company for decades, but a sales-driven company values incumbency highly, and incumbency is a bad thing when the boat you’ve been sailing is dead in the water, maybe even settling a bit. Splunk buys them time, but they’ll have to use that time wisely. Cisco loves being a fast follower, but that only works if the leader doesn’t take off like a rocket. Could that happen here? It’s going to depend on those other companies, and whether if one or more of them makes a move, some wonderful startup springs up that Cisco can buy. There are clearly risks here, and if I were Cisco, I’d be thinking about taking out some insurance, and I’ll bet they’re doing just that.
