​Cisco: Can it win enterprise data center turf war?

Cisco's U.S. enterprise business is surged in its latest quarter in contrast to rivals. Will the gravy train continue?

Cisco turned in a solid third quarter, delivered an optimistic state of the union address from outgoing CEO John Chambers and essentially stated it was destined to be the No. 1 information technology company.

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Do you believe?

Before answering that question---and it's not hard to find people on both sides of the aisle---it's worth noting Chambers' key points on Cisco's earnings conference call.

Here's the recap:

  • U.S. enterprise orders were up 21 percent from a year ago and U.S. commercial orders were up 11 percent from a year ago.
  • The pipeline for U.S. enterprise deals worth more than $1 million was up 60 percent as Cisco pushes architectural data center overhauls as well as a stack of infrastructure.
  • Average deal size was up 30 percent form a year ago. Cisco also has 1,200 business transformation deals in the pipeline worth $3.7 billion over the next 18 months.
  • "We feel comfortable with the long-term growth. Not just looking out a year or two. Now let me put this in proper perspective. If you watch where we are, all of our major IT players, almost without exception are going down year-over-year. It's a disaster in the market. We're taking share of spend and position in the market extremely well as we go forward," said Chambers.
  • UCS, Cisco's primary converged infrastructure play, has more than a $3 billion run rate with more than 43,800 customers. Cisco is also working with VCE on integrated infrastructure and partnering with major players.
  • Security and collaboration units faired well in the quarter.
  • "We continue to lead in the hybrid cloud market and increase our inter-cloud momentum. This quarter we launched Phase 2 of our inter-cloud strategy, linking different clouds together using interoperable and app-centric software to create hybrid cloud," said Chambers.
  • Cisco is moving more toward a software model as it leverages Open Stack, enterprise relationship and becomes a private cloud player. Cisco indicated that it will be software independent where appropriate.
  • "We're going to become the number one IT company," said Chambers.

This chart from Guggenheim Partners highlights Cisco's pockets of strength.

cisco-q315-chart.png

Now Cisco's argument that half of its competitive set will go extinct in the years to come isn't that unbelievable. Certainly, core enterprise vendors will miss the curves ahead. However, Cisco isn't in the clear. Here are the concerns:

The integrated stack approach only goes so far with enterprises and "solutions" selling is tired. Scott Thompson, an analyst at Wedbush, said that Cisco may not be open enough for the next-gen enterprise even if it embraces more open source. Thompson said:

Cisco's "closed" solution could drive customers away. Our checks indicate that many enterprises and, to some extent, service providers are slowly distancing themselves from Cisco, citing its "closed" architecture as the reason. While Cisco would likely disagree with this assessment, our checks consistently show that some of Cisco's more innovative customers disagree. The problem with a closed solution is that it doesn't interoperate as well with other hardware platforms in the market, particularly those from competitors.

Open platforms are important to Cisco's larger customers as they allow components from different manufacturers to be interchangeable. This, in turn, allows for a more competitive procurement process as well as added simplicity and interoperability for the consumer. We'll be watching closely to see if Cisco maintains market share as numerous large legacy customers work to diversify their network spend toward more open solutions.

Cisco is taking share in hardware, but it's unclear that infrastructure will be a growth market. Cisco made a big move with UCS and became a hybrid cloud arms dealer. That market also includes everyone from EMC to IBM to HP to Dell to Lenovo. The growth in the hardware market is going to white box manufacturers. Cisco is obviously taking share, but on a macro level the overall market won't grow for ever. Cisco will need to get its emerging markets businesses going to continue to work its UCS game. Another worry is that all data centers will be software defined in the future and that reality means less hardware.

More reading: The cloud IT arms race is going to the no-name infrastructure providers | Cisco tops Q3 earnings, revenue expectations | Cisco Systems crowns Chuck Robbins as next CEO | Cisco buys Tropo, eyes collaboration platform as a service | Oracle, EMC's VCE, Cisco integrated system standouts, says IDC

The role of the public cloud. Cisco has done a nice job putting itself in the middle of connecting clouds public and private. But if the enterprise mix ultimately shifts more to public cloud infrastructure Cisco isn't going to sell as much gear.

Software transitions are difficult. Cisco will look more like a software company in the future, but that transition is going to have a few rough spots. "You are going to see us move more and more into recurring revenue and deferred revenue. The art is to do both at the same time," said Chambers, responding to Cisco's growing as-a-service sales potential. The catch is that few enterprise IT vendors have been able to make that transition without a few hiccups.

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