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Breaking Analysis: Cisco: Navigating Cloud, Software & Workforce Change

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>> From the SiliconANGLE Media office in Boston, Massachusetts, it's "theCUBE" Now, here's your host, Dave Vellante

(upbeat music) >> Hello everyone and welcome to this week's episode of "theCUBE Insights," powered by ETR In this "Breaking Analysis," I want to look into Cisco You know theCUBE is in Barcelona this week to cover Cisco Live There's an expected attendance of about 17,000 people Now today, Cisco is a company in transition

It remains a leader in key segments, but it's refocusing its business for the next decade, having exited a number of areas over the last several years Allow me to briefly give you my perspective and review how we got here Near the end of the dot-com bubble, Cisco was the most valuable company in the world, with a $500 billion market cap It was one of the four horsemen of the internet, remember that? Along with Oracle, Sun, and EMC Cisco really rose to prominence by betting big on ethernet

Old reliable TCP/IP was the linchpin of the internet, and allowed Cisco to power the wave that virtually decimated the mini-computer industry in the 1990s There were many levers that Cisco pulled, brilliantly, during its ascendancy, and I want to call out two big ones First was it created an army of network engineers Literally hundreds of thousands of professionals trained on installing, configuring, managing, and optimizing Cisco gear Cisco created very complex solutions and thrived on this complexity, and the Cisco Certified Inter-network Experts, or CCIEs, deeply understood the dark art of networking, and Cisco was their beacon

The second was acquisitions Under the leadership of CEO John Chambers, Cisco completed about 180 acquisitions over a roughly 20-year period This enabled TAM expansion, growth, and maintained Cisco's relevance to customers, who very typically and often were the generator of acquisition ideas Cisco diversified quickly into a conglomerate with a portfolio that spanned video, set-top boxes, telepresence, compute, collaboration, security, wireless At one point, Chambers talked about dozens of adjacent businesses, each of which would account for a billion dollars of incremental revenue for Cisco

Many, if not most, didn't pan out, and Chambers slashed and burned prior to handing the reins over to current CEO, Chuck Robbins Now, under Robbins, Cisco was a more focused company, kind of going back to the basics They're betting on what I would say are more sure bets, including data center, wireless, collaboration, security, and the Edge Cisco is also evolving its model towards software subscriptions Now today, I want to look at how some of those bets are performing

I'll discuss the impact of cloud on Cisco's business, and then I want to drill in to the performance in some areas like networking, collaboration, security, and then close on hyper-converged And then the last thing I'm going to do is share some things that I'm watching as barometers of success, over the next 18 to 24 months Now the first thing I want to do is give you a snapshot of Cisco's financials today What this chart shows is some KPIs on a trailing 12-month basis Cisco is about a $50 billion company with a $200 billion market value

That's a 4X revenue multiple, which is pretty good for a company that's generally viewed as a traditional hardware player Now Cisco is guiding analysts on a flat to down year, and talking about a challenging macro environment, despite the stock market's seemingly insurmountable rise Cisco is a very profitable company, with a 33% operating margin, and very nice, 66%, roughly, gross margin Cisco throws off a lot of cash, around $15 billion annually in free cashflow They make a big deal that 70% of its software revenue is now coming from subscriptions

And Cisco is mandating a new consumption model that is subscription-based Now it's somewhat hard to tell exactly how large Cisco's software revenue is, as they're opaque in that detail, but I'm pegging it at between 11 and 12 billion by the end of this year Today it's probably seven to eight billion Cisco is riding some big waves, adding software to its portfolio, security grew at 22% last quarter, Wi-Fi 6, 5G, which by 2021 should start kicking in, it uses a chunk of its cash of course to buy back stock to keep the street happy, and it's leveraging a leadership position to compete Now finally, I want to make some comments, later actually, on how they're approaching developers in a strategy that I really like

Now there are some headwinds that Cisco's facing, namely cloud, this macro picture that they talk about, which is not positive for them evidently, the company's overall complex portfolio, the competitive dynamics, and the perception that they have an aging, or that they are an aging hardware company, and they're really still touting, selling ports So, let's drill into some of the spending data, and I want to start with this notion of leadership This chart shows Cisco's position in its core networking segment The chart depicts market share over time, which remember is a measure of pervasiveness into each ETR dataset Now look at what happens

Look how Cisco maintains its leadership, far outpacing the others in this networking sector each quarter I'm going to make some comments on the sector overall, but notice the net score in the blue bars, which is a measure of spending velocity It holds firm at 25% Not great, but holding steady And you can see the pie chart of the public cloud's impact on the sector, and I'm going to make some comments there later as we go on

But first let's look at the networking sector overall ETR just released its January survey, and here's what they said in their sentiment on networking So, when you see the networking space, it's been sort of down for a while, and ETR has been somewhat negative on the entire space, but what this shows is really net score, which is spending velocity, and the January 2020 results, with previous periods within Fortune 500 buyers And you can see there's an uptick in momentum for networking generally, and Cisco is really cited as rebounding But now look at the blue call-out

It's from an ETR VENN discussion, with an IT buyer, who essentially says, "Look, as we move to the cloud, "we are going to spend less on networking gear" And given that Cisco is the leader, we want to understand how the public cloud is affecting Cisco's networking business So to answer that, what I'm showing here is data from the latest ETR January spending survey And I'm filtering the data on organizations that are spending on AWS, Azure, and Google Cloud platform, and showing Cisco's performance measured in market share, or pervasiveness You see, that's what's happening now in these big cloud accounts

There's an N of 809 cloud customers, and 480 Cisco customers within those accounts And you can see the impact that the cloud is having on Cisco, much the same way it is affecting virtually every large supplier of on prime infrastructure A slow, steady decline over the past 10 years And you can see a net score, which measures spending intensity, in the upper right-hand corner, of almost 30%, which is somewhat lower than Cisco's average in the ETR dataset But the story's not just about cloud

There are other waves in the industry, of what I've referred to in the past as innovation cocktail ingredients, namely data, plus AI, plus cloud So the next question I want to pose is, how is Cisco doing in leveraging these waves? So here we have 916 customers in these superpower segments of data, AI, and cloud, that are combined, and we show the market share, or pervasiveness, over time, of Cisco, as compared to VMware's NSX, HPE, and Dell EMC What the data shows is a couple of points One is that Cisco is the most pervasive competitor shown in these customer segments Its net score is 37%, four points higher, meaningfully, than the cloud-only chart

Actually seven points higher than I showed earlier Only NSX has a higher net score, and relatively speaking, NSX is much newer, and should be growing much faster than Cisco, so that makes sense So I would say that Cisco is holding its own here Its challenge really, in my view, is to use data and AI to create better customer experiences So, be a consumer of AI, if you will, as a means of better serving customers, and compete in the multi-cloud market directly with these players and others, none of whom own a public cloud

Okay, so I spoke earlier about Cisco's portfolio, so let's look at some of the ETR data, and see how various parts of Cisco's business are doing This chart shows the net score, or remember, spending velocity, across Cisco's offerings, and includes Meraki, which is wireless, AppDynamics, AppD, is application performance management, we're showing here Cisco overall, Cisco Umbrella, which is cloud and DNS security, and Springpath, which comprises infrastructure for Cisco's hyper-converged offering And as you can see, the segments in which Cisco plays, there are 10 in the ETR taxonomy, spanning analytics, security, mobile, device management, infrastructure, video conferencing, et cetera, et cetera In the interest of time, I will say just the following Red is bad, green is good, and gray is neutral

And again, Cisco is holding its own in these major segments, with decent spending velocity So now, let's take a look in an area that I think is going to get a lot of attention in Cisco Live, and that's collaboration This ETR chart that I ran shows net score, or spending velocity, for video conferencing platforms And you can see, Cisco, they got some work to do It's sort of teetering on the red zone

So I would expect some continued enhancements there Now comparatively, you can see GotoMeeting losing steam, and Skype really falling off a cliff in January, but look at Microsoft Teams, that blue dot, with very very strong momentum So what Microsoft's doing is they're migrating Skype and Lync, their install base, to Teams, and they're really really well-positioned there And you can see as well, newcomer Zoom is right there in the mix, across this sample of 500 buyers Now, I want to turn your attention to a really important sector, which of course is security

This chart that I'm showing here shows net score, again, spending velocity, in the cyber security sector And Cisco is both large and credible in this space Its security business grew 22% last quarter, as I said, and it's at a $32 billion run rate So, spending momentum, maybe not as strong as Palo Alto Networks, which I'm showing here, and it's not as high as the rocket ship companies, like CrowdStrike, or Okta, or CyberArk, or SailPoint, or some of the others that I've highlighted in previous "Breaking Analysis" episodes, but Cisco's pretty solid

And you can see the likes of IBM and Symantec, by comparison, these guys are leaders in security, but their spending momentum is in the red So once again, the steam of Cisco as a large player who has credibility, this story is playing out And clearly this is going to be an area of focus at Cisco Live So this next data point is kind of interesting, and looks at Cisco's data center business, and specifically, I'm trying to better understand what's going on in hyper-converged, the software-defined platforms that bring together storage, compute, and networking Now the power of the ETR platform is that I can ask the question, how are the hyper-converged players doing inside of Cisco accounts? So what I've done is I've filtered on 458 Cisco accounts across three sectors, storage, compute, and networking, and I've isolated on Nutanix, VMware, or VMware's vSAN, Cisco itself, and Dell EMC with VxRail

And what we're doing is we're showing net score, or spending intensity, spending velocity And the first thing to point out is that all of the vendors are in the green, and that's because this is a growing market that still has legs Nutanix has noticeable spending momentum, ahead of vSAN, ahead of Cisco, and Dell EMC Now here's the thing about Cisco On the one hand, it's putting forth its own HyperFlex platform, based on the Springpath acquisition

But it has to tread carefully because it partners with converge players, like NetApp with FlexPod and IBM with VersaStack And its HyperFlex, as an HCI play, is essentially designed to replace converge platforms like these Now the same is true for VBlock, the business with Dell EMC, the old VCE business, but Cisco and Dell are at each other's throats, so, neither really cares that it's replacing them Okay, long segment, a lot to cover, I got to wrap, but I want to end by saying what to look for over the next sort of 18 to 24 months as barometers First thing is the pace of transition to software

The second thing that I'm watching is the uptake of the new core announcement that Cisco just made for big routers, silicon, and optics This is Cisco's wheelhouse, and I expect that the 5G rollout in 2021 is really going to start to pick up and be a tailwind for Cisco You know the macro should be a concern Cisco is saying its business is soft, kind of across the board, there's China, there's Brexit, but the S and P is on fire Now does that mean upside for Cisco? In other words, are they sandbagging a little bit? Or, are there more fundamental, structural, or execution issues? I think personally, Cisco may have a little bit of upside here, but they're big and exposed, so that's something to watch

The other thing is the impact of cloud on Cisco's business, and the company's ability to compete in multi-cloud, including how it embraces Kubernetes Cisco, and I've said this before, has to position itself as the best, the most cost-effective, the most secure, and highest performance network to connect hybrid and multi-clouds Now as well, the company's got to hold serve in networking, which I fully expect it to do We're seeing a little uptick in Juniper, Arista's doing okay, but they're sort of smaller in the grand scheme of things relative to Cisco Now the wild card here is VMware's NSX

So we'll be watching that and what impact it has A lot of customers have both Finally, I want to talk about developers Cisco DevNet, as I've said many times, I really like what Cisco is doing there I think they've outshone some of the traditional players

They are retraining hundred of thousands of CCIEs to code in Python, and really, code Cisco infrastructure So Cisco has an infrastructure-as-code strategy that's going to help propel them in multi-cloud, the Edge, new Workloads, and they're leveraging this engineering force that they have So, very long segment here Watch the coverage at Cisco Live on theCUBE and on SiliconANGLE It's a big chewy company, and a lot for me to swallow in one of these segments

So tweet me @DVellante if I've missed something, or comment on my LinkedIn feed, or you can email me at DavidVellante@SiliconANGLEcom Thanks for watching, everybody We'll see you next time on "Breaking Analysis, "theCUBE Insights," powered by ETR

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