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Breaking Analysis: Unpacking Cisco’s Prospects Q4 2019 and Beyond


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

>> Hello everyone, and welcome to this week's episode of theCUBE Insights powered by ETR This week, Cisco CEO Chuck Robbins has invited a number of analysts and press to San Francisco for an event to talk about the future of Cisco and no doubt the role of the company in the next decade, and I will be there So in this breaking analysis, I thought that I'd focus on Cisco and its prospects in this era of next generation cloud Of course, last week we attended AWS re:Invent, and you can catch all of our coverage on theCUBEnet, but the key takeaways are that we're entering a new era of cloud that is heavily emphasizing getting more value out of data with machine intelligence and things like Sagemaker

Now AWS was heavily focused on this notion of transformation, putting forth a strong case that enterprises have to transform not just incrementally it was a clear message that CEOs really have to lead, and AWS is striking directly at the heart of what AWS head Andy Jassy calls "the old guard," namely IBM, Dell, Oracle, HPE, and many others, including of course Cisco, saying that you can't just transform incrementally, CEOs, you have to transform whole house So today, I want to look at six areas, and I'm showing them here on this slide, but the first thing I want to do is just review the overall spending climate, and then what I want to do is discuss Cisco in the context of industry leadership, playing on Jassy's themes, and then, you know, we'll look at the spending momentum in the latest ETR survey for those leaders Next thing I want to do is I want to talk about the cloud, and it's impacting everyone, and I want to take a look specifically at how it's impacting Cisco and how Cisco is faring in the face of competition from the public cloud, which we've talked about a lot, across a number of vendors We're then going to look at Cisco's business overall from a spending perspective, and then I'll wrap with some comments on what I see as opportunities for Cisco, like edge, I want to talk specifically about multicloud and of course cloud in general So let's start drilling into the spending climate overall

Now remember, the ETR data tells us that spending on balance is reverting to pre-2018 levels, but it's not falling off the cliff Buyers, remember, are narrowing their experimentation on new technologies, and they're placing more focused bets as part of their digital transformations We're also seeing more replacements of redundant systems that buyers were running in parallel as a hedge on their bets, and that is effecting overall spending, and it's somewhat compressing spending So with that as a backdrop, let's look at some of the latest data from ETR and focus on the leaders from the latest survey So what I'm showing here is data from ETR's October 2019 survey of 1,336 IT buyers who responded, and I've selected market share as the metric across all sectors, as you can see here in number eight

Now remember, market share is a measure of pervasiveness, and it's calculated by dividing the total vendor mentions divided by the sector total, so now 'member, the ETR methodology allows for multiple responses by a vendor, so you can see in the Y axis, there could be more than 100%, okay, 'cause of those multiple respondents Now note that Microsoft, Cisco, Oracle, AWS, and IBM have the highest shared Ns or mentions, and you can see the pervasiveness of Microsoft and its prominence, which is not surprising, but Cisco, Oracle, and IBM generally have held up from a, again, pervasiveness standpoint, pretty well as you can see the steady rise as well in AWS's market share So Cisco, really the bottom line there is Cisco's a clear leader in this industry, and it's maintaining its leadership position, and of course on that chart you can see the others who really didn't make the top five, but they're prominently, you know, mentioned with the shared ends, that's VMware, Salesforce, Adobe's up there, and of course Dell EMC is the, you know, $90-100 billion company Now let's take a look specifically at spending momentum You know, what we're showing here in this chart is the exact same cut, except we've changed the metric from market share to net score

Now remember, net score is a measure of spending momentum that's calculated by essentially subtracting the percent of customers that are spending less in a given survey from those that are spending more, and that's the net score, and you can see the picture changes pretty dramatically AWS jumps up to the top spot with a 62% net score, overtaking Microsoft, but then look at Cisco It's very strong with a 36, well, 34% net score, you know, not nearly as high as AWS and Microsoft, but very respectable and holding, you know, fairly strongly, and notably ahead of IBM and Oracle, which are both in the red, you see that red area which signals caution Now what I want to do is address the question of how is the cloud affecting Cisco's business You've seen me do this with a number of other vendors

Let's drill into what it means for Cisco So if you've been following these breaking analysis segments, you know we've been reporting that the pace at which the cloud is eating away at traditional on prem data center business continues Now here's a quote from an IT pro that summarizes the situation for networking in general, and then we'll come back and specifically talk about Cisco He says, or she says, "As we migrate the data centers "to AWS, networking costs will decline (over three years)" This is a director of tech strategy for a large TELCO

So the question I have is does the ETR data back this up? Let's take a look So what this chart shows is a cut of cloud spenders, there are 818 in the latest ETR survey, and the net score within those accounts specifically for Cisco, so it's spenders on AWS, Azure, and Google Cloud, and you can see the steady decline post-2010 for Cisco, so just as I've reported for Dell EMC, HPE, Oracle, and others, you can see that the cloud's steady march continues to challenge the on prem suppliers So each of these companies is really got to figure out how to respond Now in the case of Cisco, it's moving from owning the network market to really participating in the public cloud and interconnecting clouds So we've seen Cisco make many acquisitions that can allow them to work with AWS, for example, AppD, which is application performance management, Viptela, which is SD-WAN, Clicker, which is orchestration, Duo, in-cloud security, and then you've seen bets on Kubernetes, which are going to help them span hybrid

You know, as well, you've seen them make partnerships with the leading cloud suppliers, and I'll make some comments later on when I talk about multicloud So let's look at how these diversification moves have impacted Cisco overall, 'cause they've not sat still You can see that in this chart What it shows is Cisco's market share across all of its businesses, including analytics, security, telephony, and, of course, core networking, but also servers, storage, video conferencing, and virtualization So the point is that by diversifying its business, the company has expanded its TAM, its total available market, and as I've showed you before, has maintained leadership position in the data center as measured by market share

Now here's a deeper sector analysis of Cisco's business by various sectors Now what we're showing here is Cisco's business across a number of sectors comparing the October '18 survey with July '19 and the October '19 surveys So this is net score view, and you can see across all customers that Cisco's second half net score for these sectors, which are in the green, are showing strong momentum, relative to a year ago, so here you go Meraki, which includes Cisco's wireless business, its telephony business, parts of its security business, core Cisco networking, they're all showing strength Now parts of its security portfolio like OpenDNS and Sourcefire, which is intrusion detection which Cisco bought about six years ago, and some of Cisco's voice and video assets are showing slower momentum, but Cisco's overall spending momentum is holding on pretty well

All right, let me talk a moment about some of Cisco's opportunities They're trying to transform into more of a software company with assets like Duo, AppDynamics, and they want to focus less on selling boxes and ports and more on licenses and subscriptions So it's got to use software also to unify its many platforms, so I want to talk for a moment about multicloud Hot new area, right? Everybody's talking about it Cisco recently made some organizational moves to take its separate cloud group and better align it with Cisco's core operations and a new group that they call Cloud Strategy and Compute

Now Cisco competes in multicloud with VMware, IBM, course Red Hat, Microsoft, and Google even though they partner with Microsoft and Google So here's some ETR data that looks at key cloud sectors, including the three that I've pulled out, Cloud computing, container orchestration, and container platforms So these are buyers' spending on these three areas, so there's 937 in the latest survey (laughs) You can't see that N because I'm hiding it with the pulldown, but trust me, but you can see the big players with spending momentum, and while Cisco doesn't, you know, show the momentum of an Azure or a Red Hat or even a Google, it's in that multicloud game, and my premise is that Cisco is coming at this opportunity from its strength in networking, and it's got more than a fighting chance Why? Because Cisco is, in my view, in the best position to connect multiple clouds to on prem and convince buyers that Cisco is the best partner to make networks higher performance, more secure, and more cost-effective than the competition

Now let me wrap with some critical comments, and then I'll end up on an opportunity with some comments on edge So the first thing I want to say is while Cisco is dominant in a space, it's missed a number of opportunities VMware has beaten Cisco to the punch in the initial move, of course the virtual machines, and then the Nicira acquisition NSX as I've shown before is clearly has strong momentum in the market and is really eating into Cisco's core business Cisco's ACI does okay, but it's definitely a sore spot for Cisco, and this represents a crack in the company's armor

Containers, the move to cloud-native architecture is mostly a move to public cloud, so it's a replacement or a displacement more so than a head-to-head competition that hurts Cisco here As John Furrier says, "You have cloud-native, "and if you take the 't' out of cloud-native, "you have cloud-naive" So Cisco along with others must not be cloud-naive, rather it has to remain relevant in the cloud as we discussed earlier in the multicloud discussion Now Cisco, they were the king of converged infrastructure, if you remember, with the first wave of Vblock, along with FlexPod from NetApp, and it, you know, changed the server game It drove UCS adoption, and then guys like IBM and Pure jumped in, and Cisco really became the standard

Now while hyper-converged infrastructure didn't really displace Cisco networking, Dell VMware, with VxRail and Nutanix, as well as HPE, who was in the third position, are posing a challenge, and so Cisco, they really don't play in the lucrative, high-margin external storage business, but there's some challenges there from a TAM standpoint, but I don't worry so much about that, because despite all of the rumors over the years, specifically in storage that Cisco's going to buy a storage company, you know, I think there are better opportunities in software and the edge, and as I've said before, storage right now is kind of on the back burner It's not a, it's a very difficult market for a company like Cisco to enter, so I want to talk more about the edge, 'cause I think it's a way better opportunity for Cisco Cisco among all the legacy tech vendors, in my view, could really compete for the edge, and the reason I say this is because Cisco is the only legacy player, in my opinion, that has a solid developer strategy, and it's because of DevNet DevNet is the initiative to make all Cisco products programmable We talk a lot about the API economy and infrastructure-as-code, and what Cisco is doing is they're taking Cisco-certified engineers, like CCIEs and all these people that they've trained over the years, huge number of IT pros, and they're retraining them and teaching them how to code on Cisco products to create new use cases, new workloads, and new applications specifically at the edge, and Cisco products are designed to be programmable

So they have a developer play, and I've always said the edge is going to be won by developers This is why, frankly, I was so excited last week at re:Invent about AWS Outpost and the move they're making at the edge because they're essentially bringing their stack to the edge and making it programmable IBM failed to do this with Bluemix They couldn't attract developers They had to go buy Red Hat for $34 billion

You know, Dell EMC, they have VMware, and they have an opportunity with Pivotal, but that's got to come together They currently have very little developer synergy in my view, specifically with Dell hardware, at least that I can see And there seems to be little or no effort to retrain storage admins and VM admins in the same way that Cisco is doing this with CCIEs HPE, essentially I see them like Dell in a way, throwing server boxes over the fence to the edge, you know, versus really attracting developers to identify sort of new workloads and new use cases So I like Cisco's strategy in this regard, and it's something that we're going to continue to watch very closely and probe this week with Chuck Robbins

Okay, this is Dave Vellante signing out from this episode of theCUBE Insights powered by ETR Thanks for watching, everybody, and we'll see you next time (dramatic music)

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