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Tom Nolle is president of CIMI Corporation, a TMT strategic consultancy with over 30 years experience in the fundamentals of the tech space, a former partner in a hedge fund, and an advisor to money managers and Street research firms.
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  • Cisco's Quarter Shows Strengths, Weaknesses 0 comments
    Nov 14, 2012 10:16 AM | about stocks: CSCO

    Cisco's earnings calls are almost always an education, and this one may be of particular significance given that the industry (and the global economy) is teetering on the edge of maybe-good, maybe-bad. Cisco showed some good, and some of Cisco's lessons are even applicable to other companies in the space. Some aren't and shouldn't offer much hope to competitors.

    To start with the basics, Cisco beat its quarterly revenue and profit goals (modestly). North America and Asia were its strong markets and (obviously) Europe was its worst. Margins were up slightly and service revenues outgained product revenues. Guidance was in-line with estimates and so Cisco's quarter and call were enough of a success to send the company's stock up 6% or so in the aftermarket, and nearly 8% this morning. Most any network CEO would have loved to have reported the quarter.

    Looking deeper, there are other good signs, the best of which is that Cisco sold more servers than before, ramping up its business enough that it put pressure on overall margins because UCS has a typically lower margin than network gear. Going forward, though, Cisco seemed to indicate it expected further margin compression not only from this source but from discounting to fend of competitors, obviously including Huawei.

    The best sign is that Cisco did pretty well when its competitors did badly, and in most of the spaces they did badly. That proves what my fall surveys, just coming to an end now, are showing; Cisco is gaining strategic influence with buyers and leveraging its incumbency better overall than any other player in the space. It doesn't mean they aren't vulnerable; Huawei can still force Cisco to trade margins for sales and other firms like Palo Alto can attack niche pieces of Cisco's business. But to knock off Cisco broadly, a competitor is going to have to deal with formidable sales presence and influence. Only a dynamite strategy can do that, and nobody really seems to have one.

    The bad signs? First, order growth is behind in EMEA, and obviously a slowdown there on a large scale would be hard to make up elsewhere. The public sector is also weak pretty much everywhere, and then there's the issue of growth overall. Cisco can take some market share from others, and likely has, but it's not going to be easy for the company to get to double-digit growth except through major market recovery or major changes in positioning. UCS, while stronger than before, isn't a general-purpose play as much as it is a play in the growing value of servers in network applications. That value will only increase, but its gains will be losses for the higher-price-and-margin network gear.

    The overall indicator here shouts "Cisco needs to be more cloudy!" to me, not cloudy in terms of "murky" but in terms of riding the cloud wave more effectively. The fact that UCS is "for the first time" pulling through network gear shows that Cisco is getting traction with servers in applications that mix them with traditional devices, which is really good, but it needs to lead that space since it's clearly counting on the trend to continue. Cisco's big cloud problem is SOFTWARE, and not just the spat with VMware. Cisco demonstrated with that little spitting contest that it really doesn't WANT a cloud software strategy, it would rather ride someone else's wave. That's already difficult, as VMware again shows, but it's only going to get harder.

    The network is where Cisco is, the cloud is where Cisco needs to be in the lead, and that's where Cisco is most vulnerable. It comes back to creating a vision of a network-centric cloud, not unlike what's implied by both SDN and NFV. Right now, it would be fair to say that Ericsson among the network vendors leads in SDN and that Alcatel-Lucent leads in NFV. Neither of them has effectively articulated their own leadership position, and neither has fully exploited and developed it. Where Cisco demonstrably leads (besides influence and sales account control) is in servers. The cloud is more servers than network equipment even now, and so having servers is an enormous market advantage. But having something that linked servers and networks in a techno-philosophical way would be the most powerful thing of all, and that space is still open. However, there are startups nibbling at various key elements (see my 6WIND post yesterday as an example, and also my orchestration favorite M2MI), and somebody big could pick one or more of these up and suddenly have critical mass. If I were John Chambers, I'd want to be getting my picking in now, because those who don't get in a pick may get plucked down the road.

    Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.

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