Let’s start by looking what we’d like to learn from the Cisco earnings call held Wednesday. Yes, it’s nice to know how Cisco did, particularly relative to competitors like Juniper. Yes, it’s nice to know how they characterize their quarter and what guidance they offer. What’s nicer is relating the Cisco information to the conditions in the network market, and to do that we have to factor in the Two Great Truths about Cisco as a network competitor. The first is that Cisco is a sales monster, a company who knows how to exploit account control. The second is that Cisco is an admitted “fast follower” in terms of tech innovation, not a leader. Those are the things we’ll come back to in our analysis of their results.
OK, now to the details. Cisco exceeded guidance and expectations in both earnings and revenues, and issued better-than-expected guidance. Revenue was up 7%, which is impressive in what’s surely still a difficult macro environment. Cash flow was at a record high, and recurring revenues accounted for 44% of total revenues, which shows Cisco is managing the transition to subscriptions well. Software subscription revenue was up 15% in fact. All the market segments did well except the service provider space, which was off (Cisco says) because the providers were taking time to absorb the pent-up deliveries generated because of easing supply chains.
What was interesting about Cisco’s earnings call was that they were more “futuristic” than usual. Cisco’s calls have always been replete with stories about “execution”, meaning that they were really about sales effectiveness more than product suitability. On their most recent call, they talked about “web-scale cloud infrastructure”, “hybrid cloud”, and “IoT”. Combine that with their cited analyst forecasts that IT spending will increase mid-to-high single digits in 2023 and you have the foundation for aggressive guidance, which is what Cisco offered.
They also made some specific comments in the area of management, which they were careful to characterize as “cloud management” to make it inclusive of hosting platforms. Cloud-native full-stack visibility via ThousandEyes and AppDynamics, and they promised to bring AI/ML into the management story at a faster pace.
What I’m seeing here is those Two Great Truths playing in a different way. On the one hand, there is no question that Cisco’s sales prowess showed in the quarter. Over the last three months, enterprises have been telling me that a vendor who has account control and, in particular, intense sales presence in their companies has a better chance of getting more of the assigned budget and a better chance of getting the budget increases that would benefit them. Cisco played those cards very well, and that’s the big reason for their success in the quarter.
The second “fast-follower” truth is also playing out. Juniper, arguably Cisco’s arch-rival in network equipment, has been consistently better at Cisco at innovating. Their management strategy is better because of Mist. Their SD-WAN and virtual networking strategy is better because of 128 Technology. They had a decent quarter largely because of these technology innovations. Being a fast follower means not pushing a technology innovation until a competitor proves it’s really beneficial, then doing an aggressive run at the space to own it. That’s what I think Cisco’s call is signaling. It’s time to emphasize the “fast” piece of “fast follower” versus the “follower” piece. They’re coming after Juniper’s differentiators.
This is a smart play for Cisco, not only because it’s consistent with our second great truth, but because it plays off the first. If your customer is looking at a competitor because they’re offering something innovative, you can step in at the sales level if you have account control. Nobody in the space, Juniper included, can play account control like Cisco can, and that means that competitors like Juniper have to rely on something else to level the playing field. That something else is marketing.
Marketing is the invisible, ubiquitous, powerful, virtual salesperson. It can develop demand, it can frame the competitive landscape that will define the features that are important to the buyer, and it can grease the skids of financial approvals. In short, it can do much of what sales account control can do, and it can do a few things in the early part of the opportunity-creating process that sales can’t address. Highly effective marketing can counter Cisco’s sales effectiveness, particularly if you combine it with technology innovation.
Juniper’s challenge, which I’ve blogged about for several years, is that they’ve underplayed their product assets. In their last earnings call, they talked more effectively about their technology innovations than they had in prior calls, and frankly more effectively than they talk about them on their own website. That’s let their own sales initiatives test the waters on the issues like cloud and AI and SD-WAN, without seizing ownership of the key features of the things they’ve innovated with.
You cannot out-sell Cisco, period. If you emphasize sales as your means of defending the issues that drive purchasing, then you surrender the field to the acknowledged sales elephant, which is Cisco. You can defeat that elephant only through incredibly aggressive marketing. It’s no accident that Cisco’s earnings call seems almost a counterpoint to Juniper’s call, a positioning of Cisco as the real power behind the innovative spaces that Juniper has exposed to the market. They are coming, as I’ve said, and coming hard.
The answer to that? The only one is that incredibly aggressive marketing. Cisco is signaling that it’s going to follow, perhaps only implicitly, their historical approach of the “five-phase-strategy”. A competitor comes up with something good. Cisco announces a five-phase plan that makes that something into a piece of the grand and glorious whole, a super-concept that Cisco at the time of their announcement is already in phase two of. The only defense against that approach is to define the features of the space, create the columns of the product comparisons, before Cisco can do that.
Cisco’s call is a clear sign that it, and the market overall, are entering a new phase in networking. Cisco is saying that they recognize that the feature drivers of networking are changing and that they now have to demonstrate their competence, nay their leadership, in those new spaces. If they succeed, they’ll take a leadership position in that new-model networking and their sales account control will keep them in that position. If they don’t, if Juniper or someone else defines all those feature points, then Cisco’s upcoming quarterly results may be harder to sing about.