Well, it’s 2014 and so it’s a good time to match up the looking-ahead and looking-back parts of analyzing our industry. One good way to do that is to look at how the network vendors’ stocks have fared in the last year. If you go to any of the financial sites and run a chart (as I did), you’ll find that the major players divide themselves into three groups based on how much their stocks have risen since last New Year’s Day.
The “bottom” group, Cisco, Ericsson, and Juniper, are up less than the proverbial “Q’s”, the NASDAQ 100 index. The “middle” group is one company, Ciena, who beat the NASDAQ but didn’t exactly explode, and the two inhabitants of the “exploding” category are Alcatel-Lucent, whose stock was up by over 200% versus last New Year’s Day, and Nokia who was up over 100%. The topic for my blog this first working day of 2014 is what these companies need to do in the coming year, to achieve success or secure it as appropriate.
The companies in our “Exploding” group are interesting because both Alcatel-Lucent and Nokia have lower price/sales ratios, meaning that their stock price is high relative to their revenues. You can argue that this means the Street is expecting some radical change in operating practices. In my view, one of the companies is too broad to produce that change easily, and the other too narrow.
Alcatel-Lucent has a lot of strong areas, and a lot of weak ones. Net-net, it has so many areas that it’s almost impossible for it to be successful somewhere without the same trend driving that success creating a weakness in other areas. The company needs to do two things; build an ecosystem and not a bunch of products, and cut what doesn’t fit. There’s too much cost in premier assets like Bell Labs for Alcatel-Lucent to easily shrink its portfolio, so it needs to be able to create a broader value. Given it’s a product-silo player, that’s not going to be easy. CloudBand, Alcatel-Lucent’s cloud flagship, seems to be morphing into something that could lead the cloud, SDN, and NFV initiatives within the company, but for that to happen the product guys have to let a broader story get told.
Nokia has the opposite problem; its focus on wireless and 4G in particular makes it a one-trick pony that is simply too vulnerable to competition. Wireless is currently the best of bad spaces; we know wireline margins are declining but wireless isn’t great, it’s just not as bad. It’s obvious that operators on a cost-cutting mission are going to hurt higher-margin vendors in every space they target, and Huawei is an enormously effective cost-based competitor in wireless. For Nokia, it’s got to be the service layer at this point.
In the middle group we find Ciena, another player with low price/sales ratio, in this case likely because they have very low operating margins. Optical-layer stuff tends to generate low margins, but right now the industry is working on a way of building networks that spends more on optical transport and less on aggregation at higher layers. That would benefit Ciena, but they need to be on top of that trend and right now they’re only riding a bit of the wave.
In the bottom group, we have Cisco, Ericsson, and Juniper, and in my view this group is driven by two different trends just as the top group was. Cisco and Juniper are in a space that’s been performing well historically and is now facing what’s likely to be continued downward movement of margins and gross opportunity—switching/routing. Ericsson is attempting a transition to professional services as a driver, banking IMHO on the long-term commoditization of networking to create a need for such services as price pressure squeezes out any hope of “included” support.
Cisco and Juniper both have high price/sales, and Juniper also has the highest current operating margins and P/E multiple of the major network vendors. The Street thinks they can pull something out, but the question is whether they can be “affirmative” and do something that’s actually revenue-and-profit-accretive, or whether they’ll have to cut costs or shed business units to make shareholders happy.
Cisco needs to make the cloud a success, plain and simple. It’s the only networking giant that has the credentials as a true cloud player, and so it can gain considerable differentiation from making what’s unique about Cisco into a unique asset. To do that, it has to become not an IT player but a software player. The cloud is about software, not hardware. Cisco has an OpenStack distro that’s practically unknown; it needs to be building its own cloud identity by building on that asset. It can build networking into OpenStack much more effectively than other players, more effectively than the current Neutron effort. Open Daylight might be a good way to do that, but it’s hardly differentiated. Cisco needs to think about what it could do that would be Cisco’s alone, and the answer is northbound applications. SDN and the cloud link there, and that’s where Cisco needs to be.
Juniper’s big problem is expectation. If you valued Juniper at Cisco’s multiples the company stock would be in the toilet, but unless you can generate some credible reason to believe it has better potential three years down the road than Cisco, its current multiple is hard to justify. It will never sell enough switches and routers to make up that multiple difference, especially when its operating margins are high and so it’s vulnerable to commoditization. It tried to be a software company under the prior regime, and it didn’t work. What’s left?
The only possible answer for Juniper is network functions virtualization. Kevin Johnson, the former CEO, was a lover of TCO stories. There is a major need for operational efficiency in the network today, something that the operators are already seeing, and something causing them to shift their NFV focus away from capex alone. Juniper can morph a TCO story into a full-bore operationalization story through NFV, and also use that as an on-ramp to a more effective SDN position and even a service-layer story. But it has to get moving because every other group in our three-zone market could also view NFV as a way of moving forward.
NFV builds ecosystems like Alcatel-Lucent needs. NFV can create a true service-layer architecture, as Nokia must. It can define the cloud for Cisco, frame professional services and integration opportunity for Ericsson, and help Juniper get some meat on its TCO bones. But NFV to do any of these things will have to be more than most proponents see it today, more than any vendor is positioning it to be. So while it’s possible for all of our vendors to get to the promised land in their own way, it’s also possible that how they position their NFV strategies will be the “tell” that shows whether they’ll end 2014 up…or down.