If there’s a vendor in the networking space that we need to watch closely, it’s Cisco. Not only are they a giant, and a master at account control, they’re also the most inventive when it comes to addressing (or creating, or some might say, fabricating) future trends. Their latest earnings report adds some color, perhaps, to some of their recent strategies.
Cisco reported a revenue beat, driven entirely by their infrastructure platforms category, which were up over thirteen percent year-over-year. Applications, security, and other products all came in below estimates. The Street view was that even though Cisco’s revenue and EPS (slightly, in the EPS case) beat estimates overall, and even though outlook was good, gross margins guidance and supply chain comments somewhat offset the positives. I think it’s the source of their revenue beat that raises questions.
What’s kind of ironic here is that Cisco has been doing all manner of things, including virtually all its recent M&A, to make itself less dependent on infrastructure platforms, the area that actually did well for them in the quarter. The areas that were judged most problematic by the Street were subscriptions, software, security, and applications, and those of course were the areas that Cisco was trying to boost with announcements and acquisitions. The big year-over-year revenue gain also came from a very low reference point.
It’s hard not to see the picture that Cisco painted as being one of a simple recovery of deferred spending across all types of customers. Despite swings in the stock market overall, there’s a general view that global economies are recovering and that businesses are now looking to execute on capital programs that were deferred because of the virus. That’s the classic rising-tide story, at least where companies have the account control to execute on the changing plans, which Cisco clearly does.
Account control issues may play into the problematic factors in Cisco’s numbers, too. Cisco has great strategic influence in the network. Software and applications typically fall outside the normal zones of Cisco influence in an account, and subscription and security are spaces that are shifting in response to market factors that are best exploited where strong account control exists beyond simple networking. The big push in subscription is Cisco Plus, which is a subscription hardware service that’s arguably more focused on the data center than the traditional network, particularly in terms of the organizations who’d own decisions within each buyer.
To all appearances, Cisco is shifting in response to a combination of enterprise truths. First, it’s becoming very difficult for enterprises to acquire and retail skilled technical people, in networking and in IT/operations. This has driven increased enterprise and even network operator interest in “managed services” for the former, and cloud provider partnerships for the latter. Second, lack of strong internal technical skills has made many CFOs antsy about capital projects promoted by the technical teams. Combine that with the fact that enterprises are really consuming more VPN and SD-WAN services than creating network services of their own, and that most network growth comes in the data center network, and you can see why Cisco is looking at a broader footprint in terms of both products and influence.
Another shift that seems clear is Cisco’s “ecosystemic vision”. Decades ago, I read a SiFi story about a future age when “marketing” consisted of using all manner of tricks to create what they called a “circular trust” (meaning a feedback-based supporting set of monopolies) where a lock-in was created by having one product promote another product, which in turn then promoted the first one again in a feedback loop. Cisco seems to have this in mind, and want to link their server UCS strategy, their data center strategy, their subscription strategy, their cloud strategy, and their software strategy so that accepting any of them pulls the rest through.
There are obvious benefits to this kind of “herd of camel’s noses” approach, and there’s also a competitive dynamic to consider. Remember Cisco’s strength in account control and strategic influence? If you have better, far better, control than your rivals, then broadening the playing field works in your favor because you can respond broadly and your competitors can’t. Cisco’s rival Juniper, who actually has at least as good and likely better individual elements to frame camel-herd ecosystem trusts, doesn’t do nearly as well in ecosystemic positioning, so Cisco is punching into unprotected competitive anatomy here.
Ecosystemic positioning demands an ecosystem, of course, and perhaps your ecosystem has to embrace stuff that’s still not in your own portfolio, so your herd of camel-noses can start working their way into tents. The recent steps that Cisco has taken in monitoring (exploiting ThousandEyes and acquiring Epsagon) suggest that Cisco wants to spread a management/observability umbrella over both application components and networks. Their recent partnerships with cloud providers and interconnect players to enhance SD-WAN cloud routing suggests that they’re also trying to elevate their networking capabilities, extending from private elements and MPLS VPNs to cloud/Internet routing of application traffic. All of this is aimed at addressing what they clearly believe is a sea change in how enterprises deploy applications and build and use application connectivity.
A software success, a big one, would surely help them in their cloud and application management goals, and Cisco has done a ton of software M&A, even in their most recent quarter. A lot of their software revenue comes from that M&A, which has led some to suggest Cisco just bought its way into software revenue growth without much regard for what all the stuff did in an ecosystemic sense. There’s some validity to that point, but it’s also true that all the network vendors and network operators are starved for software engineering expertise, particularly people who know cloud-native techniques. Cisco may be trying to build a workforce as much as an ecosystem, or more.
It’s tough to call how this is going to play out. Cisco has a plan that, if executed well, could work. They have the account control needed to promote their plan to buyers, and they have the nakedly aggressive marketing needed to make that promotion easier for the salesforce to drive home. Extreme Networks’ recent M&A suggests it’s taking its own run at cloud networking, and an activist investor is rumored to be looking to split Juniper’s AI and cloud networking off the legacy switch/router business. That seems to prove it’s not just Cisco that sees the changes, and the opportunities. Still, Cisco could make a go of this.
“Could” is of course the operative term. Cisco, like many marketing giants, often mistakes saying something for doing something. There is no question that Wall Street likes the prospect of a bright new set of business opportunities, and that those same announcements offer additional credibility to Cisco’s sales pitches across the board. There’s also no question that at some point, Cisco has to deliver substantial progress here or let all this ecosystemic stuff gradually fade away. In which case, they’ll need something else to replace it.