The Time Has Finally Come For Cisco's SD WAN Solutions

Summary

• The rise of unintended 'multi-clouds' has given rise to the need for integration.
• Cisco's technology has already been embraced by network operators.
• IDC's SD WAN hardware market outlook may underestimate what's in store.
• This idea was discussed in more depth with members of my private investing community, The Well Rounded Investor. Get started today »

When Cisco (NASDAQ:CSCO) acquired Viptela back in 2017 for a relatively modest $610 million, most investors didn't likely notice, and even fewer cared. The networking giant consistently makes off-the-radar deals, quietly integrating others' technologies into its own ecosystem.

This has turned out to be one deal, however, that may have been far more brilliant than it seemed at the time. See, Viptela products - now rebranded using the Cisco moniker - were a chance to establish a presence in a budding market that didn't become evident until late last year. That market is a means of managing what's inadvertently become a multi-cloud environment that's become difficult for enterprises to manage. Just within the past few days, two different surveys have confirmed a new challenge has become a top-of-mind matter for IT managers.

It's time to put the term 'SD WAN' in your lexicon.

The Rise of the Multi-cloud

It's only in retrospect we can say we shouldn't be surprised. Five years ago, most companies realized they needed to be 'in the cloud' (even without knowing exactly why) sparking a rush into cloud infrastructures and architectures that may not be quite what these organizations need.

Many of them now lament they've become 'multi-cloud' companies… organizations with more than one cloud supplier-for-hire (AWS, Oracle, Google, Azure, etc.) as well as multiple applications (SaaS, internal data centers, etc.) but with no measurable benefit to such structures.

The data: Flexera's RightScale 2019 survey of enterprises with any cloud computing operation found that 84 percent of them are multi-cloud. Similar surveys done by Kentik and Densify also found that most organizations are multi-cloud players, and worse, though containers were supposed to bring lower-cost optimization of those clouds, they've actually, unexpectedly increased operating costs.

The world should have thought out their cloud strategies in detail before rushing to develop a cloud presence. As Shashi Kiran, Chief Marketing Officer for Aryaka, recently put it:

This shifting, demanding, and dynamic environment is not a good fit for the 20-year-old legacy MPLS wide area networks on which many organizations still rely. Besides the fact that MPLS simply can't provide off-ramps to many cloud tools, adding bandwidth is expensive and simple network changes can take months. It's like trying to erect a shiny new skyscraper on a stone foundation fit for a mountain cabin. Businesses are short-changed on time to market and this is a big no for CxOs driving WAN transformation initiatives."

There's a solution. It's not even necessarily a new solution. But, it's a solution that's going to become a surprisingly critical part of the cloud conversation going forward. That is software-defined wide area networks or SD WAN.

There are multiple solutions providers for the budding problem, including Aryaka. But, this is the moment Cisco has actually been prepping for since 2017… if not before.

Cisco's SD WAN Solution

Yes, SD WAN was a key part of the reason Cisco wanted Viptela two years ago, though it's hardly the only strides the networking company has made to service a now-complicated multi-cloud market.

But, first things first.

SD WAN, in simplest layman's terms, is capable of uniting several (physical) WAN connections into one seamless network that can prioritize and optimize bandwidth. It's not the only approach of doing so, but it's the best, particularly in terms of cost-effectiveness.

And Cisco, leveraging a brand name and its deep pockets, has been developing tech for the point where enterprise-level organizations were too far into their cloud structures to unwind them.

Case in point: Cisco's Internetworking Operating System (IOS) XE is SD WAN code that readily and easily updates edge routers that are already in the field, essentially turning routers into SD WAN hardware. Aside from cost-savings, the solution allows organizations that have already made big but recent investments in hardware to not buy into another sweeping hardware upgrade.

Cisco's SD WAN platform also offers a 'Cloud onRamp' feature that optimizes the deployment of SaaS and IaaS deployments… a task that's become increasingly tough as cloud architecture becomes more complicated and security becomes crucial. More clouds mean more points of vulnerability.

Whatever SD WAN is to the world and to Cisco, big customers are stepping up. Verizon (VZ) announced last month that its virtual network services will support 5G devices using Cisco SD WAN tech, which it expects to help it deliver better optimization for its client companies' network traffic.

Cloud and Wire Inc. Senior Strategist sums up the opportunity SD WAN presents to telecom carriers - which arguably have the most to gain from its advent - like this:

It just doesn't make sense to take a premises-based network technology and apply it to a cloud architecture. SD-WAN has the ability to maximize any network connections and providers to make sure that traffic gets to the cloud in the most efficient manner, either on a packet-by-packet or an application-by-application basis."

Telcos are hardly the only ones that benefit well from the use of software-defined networks, however, that can aggregate multiple clouds that arguably should be merged into one cloud.

Bottom Line

It's admittedly a complicated matter, with growth prospects that aren't yet entirely clear. It must also be reiterated that Cisco still faces a number of competitors on the SD WAN front that's been mostly created by the rise of a relatively complicated multi-cloud environment. They include Versa Networks, CloudGenix, Aryaka, and others. Cisco's path forward won't be easy.

Nevertheless, this is an opportunity for Cisco that most investors are underestimating if not outright overlooking. It's got the brand and the cash it needs to buy solutions it can't or doesn't have time to develop itself.

At stake is what should be $4.5 billion worth of annualized hardware revenue come 2022, according to outlooks from IDC. It's not much. But, it's also only a stepping point into a bigger and better networking things. Cisco has a myriad of ancillary services and products that make for easy add-on purchases that smaller rivals like Versa and Aryaka just don't have to offer.

We've already seen it happen, in fact. Last year, it created an intent-based SD WAN networking tool that predicts what users are likely to ask their SD WAN architecture to do, and then, do it automatically. The artificial intelligence, powered by its Meraki acquisition, sent a flood of new customers to its Catalyst 9000 switches.

Cisco continues to push the SD WAN innovation envelope, looking for solutions to problems most enterprises didn't even know they had.

And for what it's worth, IDC's outlook is on the low end. P&S Market Research is calling for a SD WAN market worth nearly $10 billion by 2023. Even that outlook, however, may underestimate what's actually at stake. Cisco isn't just viewing its SD WAN technology as a solution to the problem of poorly implemented multi-clouds.

A reason to buy CSCO stock? Not in and of itself, but it certainly helps the bullish argument.

Analyst’s Disclosure: I am/we are long CSCO. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.