With a nearly $60 billion revenue run rate, growing at 14% and throwing off more than $5 billion in operating cash last quarter, Cisco Systems Inc. has an awesome business.

But customers are vocal about the complexity of Cisco’s portfolio and, if their concerns are not addressed head on, the company risks encountering friction beyond just economic headwinds. We believe Cisco’s challenges are most decidedly not product breadth and depth. Rather, the company’s mandate is to integrate the piece parts of its intricate offerings to create more facile and seamless experiences for customers.

In this Breaking Analysis and ahead of Cisco Live in Las Vegas June 4-8, we dig deeper into Cisco’s business and double-click on three key areas of its portfolio: 1) security; 2) networking; and 3) observability. We have spending data from Enterprise Technology Research and a guest appearance from SiliconANGLE contributor and market watcher Zeus Kerravala, principal at ZK Research.

Stocks of pure-play competitors outperforming Cisco year-to-date

Let’s start by doing some stock market comparisons.

The chart above shows year-to-date comparisons among Cisco, Palo Alto Networks Inc., Arista Networks Inc., Extreme Networks Inc. and the Nasdaq Composite. As you can see, the pure plays, as well as the NAS, are outperforming Cisco by a wide margin. That’s despite Cisco’s double-digit growth last quarter, 65% growth margins and a $200 billion market cap.

The reason is Chief Executive Chuck Robbins set modest expectations for 2024, which, when modeled out relative to Cisco’s longer-term outlook, suggest slowing momentum in the near- to mid-term. In addition, we believe the breadth of Cisco’s portfolio, while a key strength, also creates adoption challenges for the company’s customers.

What follows is a summary of how Kerravala interprets this data.

Kerravala sees this data as a nuanced comparison between Cisco, a behemoth with an impressive cash generation capability, and smaller companies such as Arista and Extreme. Despite acknowledging the somewhat fair comparison, he suggests that Cisco is handicapped because smaller entities may capture the benefits of a market trend more swiftly, Cisco’s broad scope often hampers its ability to do so. But Cisco throws off more operating cash in a quarter than these companies generate in annual revenue.

He used the example of Zoom Video Communications Inc. and RingCentral Inc., noting how Cisco’s performance paled in comparison two years ago, but the tide has turned since then, with the unified communications sector waning, but Cisco thriving in relative terms.

Kerravala believes Cisco’s breadth and stability make it a safe investment bet, but its size prevents it from realizing the rapid growth that smaller, more specialized companies can. The broad spectrum of markets that Cisco operates in implies a reduced likelihood of success across all these fronts simultaneously.

Watch Zeus Kerravala comment on the comparisons between Cisco and the pure plays.

Cisco’s business remains anchored in core networking

The table below represents the contribution of Cisco’s lines of business as reported in its financials. As we said at the top, 14% revenue growth is pretty astounding for a company of Cisco’s size. With tough comps ahead, it’s unlikely Cisco can keep up this pace.

Networking makes up more than half of Cisco’s revenue, but the company is growing its software contribution, which is just under 30% today, and its annual recurring revenue accounts for more than 40% of revenue, which gives the company better visibility on the future. This all helps prop up Cisco’s alluring 65%-plus gross margin model, which unlike many of its large incumbent competitors has held up well over decades. Moreover, Cisco’s shift to a recurring revenue and subscription model has been executed quite well compared with many firms (some much smaller, such as Splunk Inc.), which have struggled with that transition.

To break this down further, examining Cisco’s 10-K provides the following added context:

Secure, Agile Networks comprise core networking, switching, routing, wireless and compute. This includes products such as Catalyst, Nexus, Meraki and Cisco’s software-defined wide-area network products.

Internet for the Future includes optical networking, 5G, in-house silicon and optics solutions. This includes products such as the Cisco 8000, NCS 5500 and ASR 9000 series.

Collaboration includes Webex and call center solutions.

End-to-End Security comprises network security, cloud security, endpoint, threat management and zero-trust solutions.

Optimized Application Experiences includes AppDynamics, ThousandEyes and Intersight.

Here are Kerravala’s thoughts on Cisco’s portfolio, the challenges they face and what’s needed going forward:

Watch Zeus Kerravala unpack Cisco’s vast portfolio and how they can simplify.

Spending data underscores the macroeconomic impact on Cisco’s overall business

The ETR spending data for Cisco, at a high level, shows what virtually all tech companies are facing: a decrease in the percentage of customers that are spending more relative to last year.

The candlestick chart above shows the granularity of Net Score, ETR’s proprietary spending metric that measures customer spending patterns. Of the 1,700 information technology decision makers in the most recent ETR survey, more than 1,000 are Cisco customers – so we have a nice sample. The lime green is the percentage of those customers adding Cisco new, the forest green represents those spending 6% or more relative to last year, the gray is flat spend, the pink is spending down 6% or worse and the bright red is churn. Subtract red from green and you get Net Score, which is the blue line.

You can see the steadily declining trajectory because of the gray and the reds increasing. The brown line is the pervasiveness in the overall data set, which has actually held up well. Cisco has a massive installed base and it is stable, although more customers are leaving than are being added within this survey. Remember, this survey doesn’t measure spending amount, only the percentage of customers in each bucket.

We asked Kerravala if this accurately reflects his view of the market and is the deceleration a function of economic headwinds, complexity or both? What follows is a list of his key takeaways:

• The competitive dynamics in the networking industry have significantly shifted, with Cisco now facing more formidable rivals such as Arista, Fortinet Inc., VMware Inc. and Extreme Networks.
• The entry of cloud companies and Aruba into the networking market introduces additional competitive pressures.
• These industry changes necessitate sharper sales execution from Cisco, as it can no longer rely on competitors’ missteps to retain its advantage.
• In light of this more complex competitive landscape, Cisco’s strategy must evolve to distinguish itself effectively and maintain its leading position.

I do think a lot of what you’re looking at there is more credible vendors are in market and that has forced sharper sales execution than it did before. In the old days, Cisco could just show up and be assured that its competitors would mis-execute. That luxury is no longer in play.

Watch Zeus Kerravala comment on Cisco’s spending momentum data in the ETR survey and the changing nature of the competitive dynamics.

Cisco’s center of gravity starts with core networking

Let’s drill into the segment data, starting with networks.

The chart above shows Net Score or spending velocity on the vertical axis and pervasiveness in the data set on the horizontal axis. The red dotted line at 40% indicates a highly elevated Net Score. We’ve highlighted Cisco overall and Meraki, a company Cisco bought in 2012 to help better control network devices.

As is evident, Cisco stands out as the clear leader here in both presence (X axis) with very respectable customer spending velocity on its products (Y axis). In fact, we saw earlier a 29% year-on-year revenue growth figure from last quarter in networking. That is amazing for such a large business. As Cisco works through its backlog, it creates uncertainty in the forecasts, but underlying demand for Cisco’s networking products is sound.

As well, you can see a number of other companies here, including Hewlett Packard Enterprise Co.’s Aruba, Arista, VMware with NSX and a number of others, including Cloudflare Inc., which all are hovering near the elevated 40% line.

Kerravala laid out his thoughts as follows:

He is somewhat critical of Cisco’s approach to its Meraki and Catalyst product lines, not on the merit of their features and value but on the lines between them. He asserts that customers should not have to choose between them. He suggests a unified hardware line that offers customers the flexibility to manage it either through Meraki or the command-line interface, or CLI. Currently, a switch from Meraki to Catalyst necessitates a complete hardware overhaul, a problem that could be resolved by a common set of hardware compatible with both management methods.

Further, Kerravala notes that Cisco’s potential to integrate data center, campus and Wi-Fi certifications to improve the user experience has yet to be fully realized. While some integration has occurred at the campus level, the data center side remains separate. He concludes that networks should deliver applications and experiences as a single, unified entity instead of being sold as separate silos, an approach that contributes to unnecessary complexity.

His key analysis points include:

• He believes Cisco should offer a unified hardware line for customers, which could be managed either through Meraki or CLI, mitigating the need for a hardware overhaul when switching between the two.
• By integrating data center, campus, and Wi-Fi certifications, Cisco could enhance the overall user experience.
• The current siloed approach to network products adds unnecessary complexity, which, while non-trivial, will be addressed by treating the network as a single, unified entity focused on delivering applications and experiences.

Watch Zeus break down the Cisco’s networking challenges and thoughts on how it can simplify.

Security is perhaps Cisco’s best upside opportunity

Let’s shift gears and look into the all-important and exceedingly crowded security sector.

Above we show the ETR spending data in the security market – same dimensions – Net Score on Y and Pervasion on the X. Microsoft Corp. is in the upper right and skews the data, but you can see Cisco has a major presence. As do Palo Alto Networks and Splunk. All credible on the vertical axis.

The leaders in presence are below the 40% line, but that’s expected for such large companies. The squiggly line represents Cisco’s path over the past 10 quarters. There is no debate that the company is very strong in security, but we believe it needs to do a better job consolidating the piece parts and simplifying customer outcomes.

Note that Cisco doesn’t have the spending velocity of the pure plays such as CrowdStrike Holdings Inc., Okta Inc., Zscaler Inc., CyberArk Software Ltd. and SailPoint Technologies Inc. — or even Cloudflare – but its Net Score is respectable. Cisco also just purchased Armorblox Inc., which uses artificial intelligence to reduce email and other risks.

In many ways we think Cisco could be a leader in the security supercloud, bridging on-premises, multiple clouds and edge security experiences.

The following summarizes Keravala’s thoughts:

Kerravala claims Cisco has succeeded in cybersecurity despite itself but has a great opportunity if it can address some of the stovepipe challenges.

The emerging observability opportunity

Let’s now dig into observability, which is sort of the confluence of log analytics, application performance management, monitoring and related fields. Cisco has a major stake in this business through its acquisitions of AppDynamics and ThousandEyes.

Before we look at the spending data, here’s what one customer said in an ETR roundtable about this topic:

This is a head of engineering… a customer who says I’m sticking with AppD. This person references the value of the ThousandEyes acquisition along with AppD and security. The application-centricity is an attractive dynamic to this Cisco shop. SecureX is Cisco’s integrated security play, which admittedly needs more and better integration. But basically in the second quote this person calls out the attractiveness and value of a single platform. If you’re a Cisco shop. And if not it’s a “free game” – perhaps implying a free-for-all of complexity.

AppD perhaps presents the biggest opportunity for Cisco since they’ve acquired it. I really expect AppDynamics to become the tip-of-the-arrow sale for Cisco… and I would like to see AppD become a lead sales tool across Cisco’s portfolio. I think it must (and will) happen -Zeus Kerravala

Watch Kerravala’s commentary on Cisco’s observability play with ThousandEyes & AppD.

Comparing key observability players’ spending profiles

Let’s get into the ETR data. ETR doesn’t have a full-stack observability category, but through this next view below we’re able to bring in various companies that are hovering around the space to see their relative positions.

It’s a similar chart above where we show Net Score against pervasiveness in the data. And we’ve plotted Splunk, Datadog Inc., Elastic N.V., Grafana Labs, Dynatrace Inc. and New Relic Inc.. You can see AppDynamics, which Cisco bought in 2017 for almost $4 billion. And it introduced Intersight shortly thereafter as a visualization and orchestration tool. But there were still holes in the portfolio as the market moved to full-stack observability, so Cisco bought ThousandEyes during the COVID pandemic for about $1 billion. Then it sort of strung them together with an overlay, but the story is not over.

Cisco has an opportunity to really take these pieces and integrate them across the portfolio in a potentially game-changing way. At least in the manner that one customer described earlier – especially for Cisco shops.

Kerravala’s primary argument is that the industry needs to to deliver on the vision of full-stack observability. Cisco has an opportunity to lead by streamlining its many panes-of-glass solutions into a unified, intuitive dashboard. The diverse range of visibility tools it currently offers could be more effectively utilized if they were integrated into one comprehensive system, with AppD serving as the principal lens. Operational specifics could then be accessed through drill-down features, allowing for a more organized and efficient user experience. This could be game-changing for Cisco.

Kerravala’s key takeaways on observability:

• Cisco must make good on its promise of full-stack observability.
• The current multitude of Cisco’s single-pane-of-glass solutions should be streamlined into a unified dashboard.
• AppD should be the main view, with the ability to drill down into the other specific tools.
• He recognizes that Cisco already has all the necessary components; the challenge lies in integrating them into a cohesive system.

Kerravala comments on Cisco’s many panes of glass.

What to watch at Cisco Live 2023

Kerravala just published a “Know before you go” post on SiliconANGLE, outlining his thoughts on what to expect at Cisco Live. Let’s review that and what we’ll be looking for next week.

Whither AI for Cisco?

A key question is how Cisco will handle AI. These days, brands run the risk AI washing, but if you bury the AI lede, you look less relevant. In our view, Cisco at the very least has to use AI to make Cisco infrastructure run better and more secure through automation and better management.

Here’s a summary of key points from our conversation with Zeus on what to expect from Cisco Live in terms of AI:

• We don’t expect Cisco to brand itself as an AI company like Nvidia Corp. or even IBM Corp.’s attempts to do so. Instead, AI will remain an integral part of their overall toolkit used to build their products.
• AI has been part of Cisco’s portfolio for a while. It underpins products such as intent-based networking and Encrypted Traffic Analytics, which uses AI to detect malware in encrypted traffic.
• The company’s collaboration portfolio is also AI-rich, but it is considered more of an operational tool rather than a product that’s sold separately.
• AI might be highlighted more during keynotes due to current hype, but it’s not the company’s primary focus.
• The use of AI, such as a ChatGPT-like interface, could be beneficial for Cisco’s operations, like using Webex to find information or for network operations to identify areas in need of upgrades. This would essentially make their portfolio more user-friendly.
• Natural language processing can simplify interfaces, relieving the load from high-level engineers and delegating tasks to tier one or two support.

The security opportunity calls for Cisco

We’ll be watching the security space closely. We believe it’s a mandate that Cisco integrate its vast portfolio across on-prem, all the major clouds and out to the edge. Palo Alto Networks has the leg up on consolidation in our opinion, but Cisco has such a major presence that it can do very well in this area, coming at the problem its strength in networking.

Here’s a summary of what we think Cisco needs to do in security and what we’ll hear at Cisco Live:

• Security is important because it offers the most substantial growth potential for Cisco, as it is a single-digit player in a market projected to be worth $75 billion-plus.
• Even a slight increase in market share, such as reaching 10%, would greatly boost Cisco’s revenue.
• The long-term vision is to have Cisco’s security share match its network share, and to have Cisco network and Cisco security working together for improved risk identification and resolution.
• We hope to see more integration of Cisco’s cloud security products to create a more unified and user-friendly experience.
• The security industry often makes the user the integration point, which can lead to confusion and inefficiency. This needs to be addressed by the industry at large and Cisco has an opportunity to attack this problem.
• Cisco is in a unique position to make security more user-friendly and seamless because it owns the network and can embed a lot of security features into it.
• We anticipate hearing more about Cisco’s progress on its vision for security and expect to see more of the product roadmap at the upcoming event.

Can Cisco be the supercloud network?

Core networking is always a the forefront of Cisco Live. I keep coming back to the supercloud concept – a singular experience across clouds in a cloud-native fashion. Can Cisco bridge the legacy world of apps and infrastructure with cloud-native?

• Cisco is not going to become a cloud provider like Amazon Web Services Inc., but it has the potential to be an abstraction layer that enables the concept of a “supercloud.”
• A network supercloud would allow customers to use multiple cloud providers, edge locations, and private data centers seamlessly as one logical cloud.
• Traditional cloud providers will not enable this, as their tools are specific to their platforms. Cisco, however, can provide network transport, security and optimization that transcend individual cloud platforms.
• Cisco can become the bridge between physical clouds and create a logical supercloud thanks to its work with cloud providers, telcos and tools such as ThousandEyes and AppDynamics.
• This process begins with networking, hoping to see more progress with the Meraki/Catalyst integration at the upcoming show. We are also looking for advancements in consolidating different versions of Wi-Fi and other disparate parts of Cisco’s networking story.

Collaboration: Hybrid work is still a big thing

What about collaboration? That business went from rocket ship to rapid deceleration post-pandemic, but hybrid work isn’t going away and it brings real challenges. Is this a game of integrating with your security portfolio to reduce risk? Or creating better and more simplified user experiences? We know that Jeetu Patel wants to make Webex 10 times better than any other platform.

• We believe Cisco’s primary challenge in the collaboration market is Microsoft Teams. Despite having a poorer user experience compared with competitors, Teams is widely adopted thanks to its inclusion in Microsoft licensing plans.
• Teams, however, can prove costly when additional features such as voice and security are added.
• Cisco has accepted the coexistence with Teams, allowing its devices to run Teams natively. This could be beneficial as companies are likely to use more than one collaboration vendor.
• We believe Cisco’s WebEx, loaded with extensive features, can offer a better experience for specific departments and expand its presence within organizations gradually.
• A suggested strategy for Cisco is to manage other collaboration platforms through the WebEx console, offering better management for those platforms and then gradually introducing their own solutions.
• In the context of observability, the application-centric view is crucial. Prioritizing network upgrades and security deployments based on their impact on application performance can provide quantifiable business metrics.
• Cisco’s AppDynamics offers a unique perspective into application performance that other infrastructure vendors may lack. This tool could be instrumental in making such decisions.

Application centricity is the opportunity in full-stack observability

Cisco we think has an opportunity to make some moves in full-stack observability, but the linchpin as Kerravala wrote on SiliconANGLE is the application-centric view of the world. The two main takeaways from our conversation on observability include:

• The application-centric view is crucial. Prioritizing network upgrades and security deployments based on their impact on application performance can provide quantifiable business metrics.
• Cisco’s AppDynamics offers a unique perspective into application performance that other infrastructure vendors may lack. This tool could be instrumental in making such decisions.

Every large tech company has to address ESG

And finally we asked Kerravala if he has ever been to a Cisco Live where Chuck Robbins hasn’t done his part to address environmental, social and governance issues? Here’s a summary of what we discussed:

• Cisco has a corporate goal to positively impact a billion lives by 2025. It’s making significant progress toward this goal through a variety of programs. It’s part of the Global Citizen group, and it conducts contests and provide financial support to entrepreneurs aiming to make the world a better place.
• Cisco’s products also help with sustainability. They are embedded with features such as EnergyWise, which shuts off the network when it is not in use and turns it back on when it is needed.
• Cisco’s custom application-specific integrated circuits are optimized for specific network functions, leading to lower power consumption.
• The company offers Power over Ethernet features to further support sustainability.
• At events such as Cisco Live, it has highlighted these sustainability features, and we expect to see more of this in the future.

We didn’t talk much about edge, but it’s a significant part of the future and we anticipate hearing more about it in the future.

Here’s the full conversation about what to expect at Cisco Live

Finally, theCUBE will be at Cisco Live in Las Vegas at the Mandalay Bay. We’re on the expo floor across from the Net Vet Lounge, which is Booth 1427. We have a small space so we’re doing the pop-up CUBE and we’d love to see you. By all means please stop by and say hello.

Keep in touch

Many thanks to Zeus Kerravala for stopping by the studio to share his knowledge. Thanks to Alex Myerson and Ken Shifman on production, podcasts and media workflows for Breaking Analysis. Special thanks to Kristen Martin and Cheryl Knight, who help us keep our community informed and get the word out, and to Rob Hof, our editor in chief at SiliconANGLE.

Remember we publish each week on Wikibon and SiliconANGLE. These episodes are all available as podcasts wherever you listen.

Email david.vellante@siliconangle.com, DM @dvellante on Twitter and comment on our LinkedIn posts.

Also, check out this ETR Tutorial we created, which explains the spending methodology in more detail. Note: ETR is a separate company from Wikibon and SiliconANGLE. If you would like to cite or republish any of the company’s data, or inquire about its services, please contact ETR at legal@etr.ai.

Here’s the full video analysis:

All statements made regarding companies or securities are strictly beliefs, points of view and opinions held by SiliconANGLE Media, Enterprise Technology Research, other guests on theCUBE and guest writers. Such statements are not recommendations by these individuals to buy, sell or hold any security. The content presented does not constitute investment advice and should not be used as the basis for any investment decision. You and only you are responsible for your investment decisions.

Disclosure: Many of the companies cited in Breaking Analysis are sponsors of theCUBE and/or clients of Wikibon. None of these firms or other companies have any editorial control over or advanced viewing of what’s published in Breaking Analysis.

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