Wall Street will be watching Cisco on their earnings call this week. I will to, and so should you all, but probably with a different set of goals and looking for signals only slightly related to the Street interest. Cisco is an important player whose behavior will tell us a lot about the timing and extent of our SDN and NFV revolutions.
Cisco has three primary product lines that we should be interested in; routing, data center switching, and servers. The routing products will offer us some sense of where service providers are in their overall network infrastructure plans, and of course Cisco will talk about that in their call. I think the likely story here is that service provider spending is still a bit weak—not a disaster but nothing to jump for joy at. That would indicate that operators are still pursuing recapitalization of infrastructure but not enthusiastically.
If the story is that service provider spending is off significantly, if Cisco says a lot about weak secular trends in the space, then it’s telling us that the revenue/cost-per-bit squeeze is already being felt. That would mean operators will be looking for a different strategy to adopt in 2016, and in the meantime are putting pressure on spending and prices.
If spending is much stronger, then it tells me that operators do not believe that they will get any relief from new technologies like SDN and NFV in 2016. They’ll have to either wait longer or try a different approach, and that would be very bad news for our revolutionary duo. Waiting longer isn’t possible for many of the operators, and so they’d likely either start looking for price-leader suppliers (Huawei) or start thinking about how to build networks with less routing intelligence, at least from traditional devices versus software routers.
We may get some hints from what Cisco says on the switching side. While most of their sales will be to enterprises rather than operators, it’s possible Cisco would say something about strong sales to operators for cloud data centers. Such a story would indicate that operators are either (finally) getting serious about offering cloud computing services or are preparing themselves for NFV commitments. I don’t think this is the case, and I don’t think Cisco will have much to say about switching success to operators overall.
As I said, switching will be the bellwether for enterprise network spending health, and here is where I think there’s a chance that Cisco will beat estimates. Enterprises are doing better in a profit sense and they’ve also held back on capital improvements or modernization for IT infrastructure and networking. Cisco has always been the master of account control for enterprises, and so they should do well, meaning enough to beat estimates overall by a couple pennies per share.
If Cisco does not report strong enterprise switching sales, then it would suggest that SDN in particular is starting to overhang buying. I don’t think we’re anywhere near the time where SDN actually steals budget dollars, but if you’re a planner and you see a change coming down the line, you slow-roll your investment in the old long before you start spending on the new. Enterprises would stretch the useful life of gear just a bit longer, and we’d see that in a dip in buying interest.
If Cisco does a lot better in enterprise switching, it would mean that enterprises were cheerfully ignoring any near-term impact of SDN on their network plans. That would mean that serious white-box competition is not only nowhere to be seen, but not even being hinted. The bigger the win Cisco posts here the smaller the chance that anything is going to upset the legacy switching apple cart. This could happen; it’s the second-most-likely outcome after the slight-beat in switching I opened with.
On the server side, I think it’s likely that Cisco will also beat expectations on UCS sales, but not gain much in the way of profit since UCS margins are slim (and price pressure strong). The big question is whether Cisco reports the pace of UCS growth is accelerating, which they’d likely to by ballyhooing the progress.
We’re seeing in UCS sales a combination of where Cisco wants them to be in targeting terms, and how well that segment set is accepting them. It’s not that Cisco would hesitate to sell servers to a pure-batch application play, but that their sales types would not be likely to pursue that sort of customer in the first place. If Cisco whoops and hollers about UCS sales growth, then it’s saying that network-centric issues are a growing driver of server sales. It means that the cloud, controller functions, and so forth are increasingly important.
The contrasting position, which is that UCS doesn’t seem to be sparkling, would suggest that network-centric server applications aren’t making much headway. That would be a bad sign for the cloud, for SDN, and for NFV. It would also be a bad sign for telecom spending, particularly if the other product areas suggest that telecom is weak as well.
The UCS positioning potentially plays off Cisco’s cloud strategies, which include its InterCloud offering to the telcos. The first question will be whether Cisco makes the cloud connection strongly or blows a few cloud kisses. If Cisco is seeing that buyer traction for cloud-centric IT and networking is developing, it will tout its accomplishments in that space. If it doesn’t it will hang back a bit so it’s not tarnished with what might be a dry brush.
A very strong cloud story on the earnings call would mean that Cisco thinks the cloud is going to be big for it, and that it might be moving from its traditional fast-follower to leader role in cloud positioning. The other indicator we’d want to watch there is software.
Cisco has never been able to make software work for it, but it’s pretty hard to see a cloud-centric vision that lacks software, or a cloud leader that lacks software leadership. If Cisco decides to make a serious run at the cloud, at being the next IBM, then it will have to make software a major focus. They’re not likely to talk about their future plans on an earnings call, but if Cisco says much about software or if Cisco starts talking about cloud software differentiation working for them, we’ll know what’s really behind the yammering. It will be a precursor to some software-centric moves.
Another general indicator to watch is what Cisco says about competition. Chambers dismissed white-box competition, and I think that’s fair to do given the difficulty in driving an SDN-centric vision of switching in the current market. If Cisco says that competition is driving down margins and sales by driving down prices, that unit buying is still good, then they’re saying that buyers are reinvesting in the present network model and applying a risk or ROI premium to the deals. If they admit that buyers are waiting for a new model, they’re saying that Cisco will be there with that new model down the line.
So there we are. I’ll be watching what Cisco says on their call, and I’ll comment here on what I think it signifies for us all.