Analysts upbeat about Cisco after positive 2Q results
Company sustains growth while working to keep pace in highly competitive strategic markets
Although buoyed by a strong U.S. dollar, Cisco’s 2Q15 revenue growth of 3.9% year-to-year is a testament to the company’s ability to evolve long-standing corporate strategies in the face of disrupted IT models, notes Krista Macomber, an analyst at Technology Business Research (TBR).
The company achieved record quarterly revenue of $12.8 billion despite facing economic upheaval in emerging countries including Brazil and Russia, intensifying competition from several smaller players including Huawei and Juniper, and creeping commoditization of network hardware due to the industry shift to software-mediated technologies.
In particular, Cisco’s Routing and Switching growth of 2.5% and 1.9% year-to-year, respectively, as well as the 4% expansion to its Service Provider revenue, point to success in carrying customer relationships into next-generation business and IT strategies. Vision-matching with customers around IT architecture evolutions, with an emphasis on the value of Cisco’s core networking expertise in driving digital-enabled business outcomes, is helping Cisco to offset the impact of declining spend on the proprietary switches and routers that were historically core to Cisco’s business, says Macomber.
Cisco will be increasingly pressured to increase its number of large multi-year service contracts, penetration of growing, strategic markets such as security, managed services and hyper-converged infrastructure, and customer utilization of its software-defined networking (SDN) capabilities. Cisco is building and executing on a pipeline to demand in several of these areas, as indicated by its 8.2% Wireless growth, driven by Meraki cloud-managed Wi-Fi sales. However, critical gaps in evolving Cisco’s go-to-market and portfolio to fully capitalize on as-a-service delivery model and emphasize the strategy consulting that customers need to transform their IT infrastructure remains. For example, Cisco’s security revenue growth slowed to 4% year-to-year in 2Q15, after achieving 14% year-to-year growth in the previous quarter. TBR believes Cisco continues to face challenges in elevating customer conversations from the features of Cisco’s traditional network security products to Cisco’s new vision for advanced, threat-centric technologies combined with managed and professional services.
Macomber says agility and heightened investment in strategic markets are critical to the pillars that Cisco’s new CEO, Chuck Robbins, has identified to drive Cisco’s strategy going forward. In the words of Robbins, these pillars include “accelerating what's working and changing what's not, simplifying our business, driving operational rigor, and investing in our talent and our culture.” Cisco’s recent exit of the flash storage market and its planned divestiture of its set-top box business indicate that it is willing to exit misplaced or mismanaged portfolio bets in favour of increasing spend in markets with stronger opportunity for profit and differentiation. Both of these decisions were made under Robbins, who has only been CEO for three weeks—indicating that Robbins is moving quickly to guide Cisco through portfolio, alliance and go-to-market strategy evolution.
TBR believes that Cisco’s go-forward path to success centres on positioning as a preeminent partner to help channel partners navigate the transition to as-a-service IT delivery, fluidly adjusting resources to deliver comprehensive software- and services-led offerings, and continuing to hone its business outcomes-focused narrative in tandem with the rising influence of line-of-business IT decision makers. Although a tall order for a large industry incumbent historically known for expensive, closed hardware, Cisco is demonstrating an ability to evolve its strategy and execute to remain an industry mainstay.
Cisco is one step closer to executing on Intercloud with Piston
Cisco announced its intent to acquire OpenStack specialist Piston as a piece of its strategy to secure a leading position as a private cloud infrastructure provider by building a stable of enterprise-calibre OpenStack capabilities. OpenStack has grown over the past six years to become one of the world’s most popular open-source cloud software platforms through its growing ecosystem of technology partners such as Red Hat and large community of developers. However, enterprise production deployment has been limited to date due to technology and ecosystem immaturity. OpenStack is difficult to deploy and integrate into environments, and many SMB and midsize enterprise customers do not have the resources needed to make this transition, creating an industry pain point that Tier 1 solutions providers including IBM, HP and Oracle have an opportunity to solve. TBR anticipates further consolidation of OpenStack vendors and increased production deployment of OpenStack-based private and hybrid clouds over the next one to three years as Tier 1 solutions providers invest to capitalize on this opportunity.
Piston is a smart expertise and technology buy for Cisco. Its key platform, CloudOS, makes it easier for customers to provision, deploy and automate management of large-scale distributed private cloud solutions. Private clouds are becoming more complex and distributed as customers shift a greater portion of their workloads — and more mission-critical workloads — onto private cloud environments. As a result of this trend, technologies like CloudOS that make it easier for customers to centralize management of many server clusters are becoming strategic for customers to improve operational efficiency—improving Cisco’s value proposition in the growing OpenStack marketplace. Piston was co-founded by Joshua McKenty, a former NASA employee who helped launch OpenStack. Although McKenty has since left Piston to join Pivotal, Cisco is acquiring a team with deep expertise in optimizing OpenStack private cloud infrastructure needed to bolster and differentiate Cisco’s portfolio in a rapidly changing, increasingly competitive environment.
Cisco launches IoT System to stand out in the increasingly crowded yet strategic market
As a piece of its efforts to support business transformation for customers, Cisco has staked a claim in the enterprise Internet of Things (IoT) market. TBR believes that Cisco is focusing on improving collaboration between business and technology leaders. In this regard, we see Cisco building early differentiation by solving key pain points: helping business leaders understand the potential and limitations of the technology, and technology leaders understand not only business needs, but also where businesses want to go so they can suggest relevant business solutions.
Cisco’s IoT System, launched in June 2015, is the cornerstone of its IoT capabilities—spanning the six core functions required by most IoT solutions, including networking, fog/edge computing, security, data analytics, management and automation and application enablement. The IoT System’s one-stop-shop approach, with complementary data center and consulting services capabilities, is one of its greatest assets because it addresses one of the greatest challenges customers face when exploring the business applications of IoT: where to start. As a result, Cisco is a logical short list IoT vendor in a growing, although soon-to-be-crowded, market.
As numerous other vendors, including IBM, begin offering similar IoT capabilities in the near term, Cisco can build from its early efforts to provide a one-stop-shop experience by injecting purpose-built technologies into its overall IoT strategy. Not only will this help to sustain Cisco’s differentiation in the IoT market, but it will also help to protect Cisco’s network industry incumbency during the shift to SDN and white-box switching.