Is Cisco = HP + Ericsson? Developing End-to-End DC Solutions

Summary Bullets:                 

  • ·       Cisco’s Q3 earnings report statement is impressive and trendsetting
  • ·       Wireless bandwidth expansion needs more QoS, to improve profitability

Cisco delivered a neat and fast Q3 (Feb-April) financial result last week (, marking its ninth consecutive record revenue quarter, and generally outdoing market expectations. The results were presented by the captain, remarking that ‘Cisco is executing at a very high level in a slow, but steady economic environment’. The Q3 revenue figure of $12.2bn is 5.4% better than last year, and twice what the company delivered in Q3 2005 – so, steady yes, but slow, not at all.

Cisco has always been a great bellwether for trends in the WAN infrastructure and the global networking dynamics. Earnings in its largest product segments, switching and routing, are overall flat, whereas its data center UCS and the integrated Nexus switches jumped 77%, its wireless business grew 27%, and its service provider video product sales increased by 30%. Driving these growth areas is the  continued growth in cloud services traffic, and the mega data centre nodes delivering the cloud services. The continued shift to wireless is no surprise either, whereas the strong growth in video product sales may indicate that this slow-growth UCC video component along with more interactive consumer cable solutions, are finally taking off.

Looking at the regional performance, Europe and Asia/Pacific revenues were flat, whereas the US grew 7% and Emerging Markets shot up 13%. With Huawei sales more or less deep-frozen on the US market due to security concerns, Cisco is having a field day there – and even managed an 8% growth in China!

Cisco’s rock-steady 20 year growth record in the network infrastructure business may appear smooth (almost IBM-like) on the surface, but relies on a willingness to make seismic-shift business choices in its core business. The strong Q3 results owe a lot to successful shifts in its enterprise customer space, notably its entry into the UCC market with UCS, and development of its converged Nexus line. Conversely, Cisco investments in the consumer space (remember Flip and more recently Linksys?) have generally not gone well.

Looking at the Q3 balance sheet, what trend lines emerge, and how does this performance reflect changes in global WAN infrastructure (not overlooking the fact that some, geographies are still stuck in the economic doldrums)?

One indicator is to look at what Cisco has recently acquired and what the company proposes to acquire in the near future. Recent acquisitions include Intucell, Ltd., a provider of advanced self-optimizing network (SON) software products that enable mobile carriers to plan, configure, manage, optimize, and heal cellular networks automatically, according to changing network demands. It has also added Cognitive Security, headquartered in Prague, Czech Republic, to its security portfolio; with an integrated range of software technologies to identify and analyze key IT security threats through advanced behavioral analysis of real-time data. On the acquisition roadmap is SolveDirect headquartered in Vienna, Austria that provides cloud-delivered services management integration software and services; and Ubiquisys, a long-time Cisco partner, providing intelligent 3G and long-term evolution (LTE) small-cell and femtocell technologies that provide seamless connectivity across mobile heterogeneous networks for service providers.

Apart from all these companies being European, they are all in Cisco’s high-margin business areas, and will be able to support Cisco’s growth trajectory: enhancing the wireless infrastructure, delivering real-time network security, offering cloud delivered service management, and LTE wireless network end-points.

The Cisco enterprise and carrier product and service lines appear to be merging more and more – be it private cloud, hybrid or carrier/IT service provider clouds delivering everything-as-a-service. The strategic direction chosen is clearly to optimize and secure the end-user experience.

However, we are still not seeing any closer service links across the fast growing wireless LTE infrastructure. Could Cisco provide QoS across its wireless links to support latency sensitive cloud based ERP apps? Could this be deployed and monetized by Cisco’s carrier and IT service provider customers? In many instances the enterprise customers are much more interested in solid and predictable network performance than in lots of best-effort, fluctuating bandwidth, LTE or otherwise. Clearly, the acquisition strategy that Cisco is pursuing will bring more and more capabilities to build an end-to-end wireless service delivery capability. Getting the acquired technologies and platforms aligned and integrated in a heterogeneous WAN environment will be an arduous task – but if not Cisco driven, then who could step up to the plate?

In its account relationships with carriers and IT service providers, it will be key for Cisco to have a very clear well-documented view of enterprise customer priorities, when proposing significant (or even massive) infrastructure investments. But such deliberations seem urgently needed as the recent spate of wireless infrastructure investments seem driven by consumers insatiable bandwidth appetites. But margins in that cutthroat business are low. Focusing on enterprise grade wireless services may well deliver more value. 

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