Daily Archives: August 5, 2009

Cisco’s Ambiguous Q1 Guidance Leaves Market Uncertain

Cisco’s fourth-quarter results hit the street earlier today.

I would rate them a decidedly mixed bag. Cisco’s adjusted earnings for the quarter were about 31 cents per share, comfortably surpassing consensus estimates. Quarterly revenue fell within the range of consensus estimates at about $8.5 billion.

Compared to results in Cisco’s fourth quarter last year, earnings were off 46 percent and revenue was down 18 percent.

More disconcerting was Cisco’s guidance. CEO John Chambers said it was too soon to call a recovery and forecast another drop in quarterly revenue. Despite his reluctance to call a market bottom, Chambers said that Cisco “saw a number of positive signs this quarter in the economy and in our business.”

Yesterday, before the call, I suggested the following:

A key to how the market reacts, as always, will be the guidance provided by Cisco CEO John Chambers and his executive team. Analyst and investors will be listening closely to the tone as well as the substance of what is said. Sentiment – Is the market coming back and, if so, how much? – will be a critical factor in after-hours and next-day trading.

What analysts and investors got from Cisco was measured ambiguity and ambivalence. In the midst of the most punishing economic downturn since the Great Depression, they were hoping for something more definitive and hopeful.

Chambers, as noted above, provided some encouragement, pointing to product lines that were growing, business cycles that were beginning to gain a semblance of normalcy. He also said Cisco now was looking forward to growth, having completed an austerity program that resulted in layoffs of more than 2,000 employees in the last two quarters, a higher number than Cisco disclosed previously.

But despite noting that the fourth quarter delivered the first instance of sequential growth in product orders the company had experienced during fiscal 2009, he wasn’t ready to call it a trend, wasn’t prepared to shovel dirt on the downturn.

That reticence made an impression on those listening to what Chambers had to say. In after-hours trading, as of 7:10pm ET, Cisco shares were down 67 cents or 3.02 percent.

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Vonage: Above Water, but for How Long?

Aggressive cost cutting helped Vonage eke out a narrow profit in its second-quarter results. Still, I believe the earnings news is a last hurrah rather than a sign of things to come.

How can Vonage stay afloat in competitive sea roiled by triple-play cable MSOs and telecommunications carriers on one side and voracious wireless operators on the other? The latter, in particular, are mercilessly eating into Vonage’s subscriber base.

Vonage was a pioneer in bringing VoIP services to the masses. Barring a magical reinvention, it doesn’t have a bright future.

Catching Up with Arista Networks

Way back in September of 2006, I wrote a post about Andy Bechtolsheim leaving Sun for a startup.

Well, Bechtolsheim had joined a startup company, though he’s never officially left Sun. Even now, you can still find his profile on the Sun (perhaps soon to be Oracle) website. Before news of the Oracle takeover, he was said to apportion a day per week at Sun, spending the rest of his time with his new company.

That company would be 10-Gigabit Ethernet switch vendor Arista Networks (nee Arastra Networks), founded originally in 2004 by Bechtolsheim, David Cheriton, and Ken Duda. Bechtolsheim presumably was working nearly full time at Sun while the other gentlemen held the fort for a couple years, designing and building the startup company’s first products.

In the autumn of 2008, Jayshree Ullal came aboard as the Arista’s president and CEO. Ullal is a 25-plus-year veteran of the networking industry, having worked at Crescendo Communications, Cisco System’s first acquisition and the source of its money-spinning Catalyst family of switches, before advancing through a series of increasingly senior roles within Cisco. Immediately before she joined Arista, Ullal served as senior vice president of Cisco’s data center, switching, and services group.

Meanwhile, Bechtolsheim, Cheriton,and Duda are not without illustrious accomplishments.

Bechtolsheim was a co-founder of Sun. He left Sun to found Granite Systems, a pioneering Gigabit-Ethernet switch vendor. In 1996, Cisco acquired Granite, of which Bechtolsheim owned about 60 percent, for $220 million. (At Cisco, Ullal was involved in the acquistion.)

Somehow spurning the urge to retire in a tropical hideaway with the riches he had accrued from his successes at Sun and Granite, Bechtolsheim became vice President and general manager of Cisco’s Gigabit Systems Business Unit. He left Cisco late in 2003 to join Kealia, Inc., a vendor of high-performance, AMD Opteron-based servers acquired by Sun in 2004.

Reputed to be a billionaire — no mean feat in itself — Cheriton co-founded Granite Systems. After working for a time at Cisco, he became a co-founder of Kealia in 2001. As such, their collaboration at Arista represents the third time Cheriton and Bechtolsheim have joined forces.

They have another connection: Bechtolsheim and Cheriton were two of the first investors in Google and early investors in VMWare.

For his part, Duda was a senior engineer and a significant contributor at Granite Systems and Cisco Systems. He and Cheriton have a long working relationship.

So, a veritable all-star team has been assembled at Arista Networks. It’s a cast of characters that has enjoyed a string of stunning technological and business successes. They’re rich as Croesus, too.

That explains why the company has been privately funded from the seemingly bottomless pockets of its founders, who intend to finance it through to IPO (do those still happen?).

It’s established, then, that Arista has talent and money. It also has a proven formula for success, one that Ullal knows well from her time running Cisco’s switch business.

The Catalyst switch family came to dominate enterprise switching on the strength of a solid switch architecture, a software secret sauce (Cisco IOS) that differentiated it from competing products, and a compelling marketing message that emphasized a qualitative differentiation that extended well beyond ticky-tacky spreadsheet-based comparisons of “speeds and feeds.” Oh, and it also helped that Cisco had the industry’s largest and most pervasive sales force, with a Batman-and-Robin combination of account managers and sales engineers relentlessly pursuing every account that mattered.

Ullal has put together the right formula for success, but she’s missing the sales force, To her credit and that of her colleagues, they’re scrambling to build a channel to serve their nascent market, trying hard to get to all the pertinent account opportunities.

Despite a recession-related setback at the end of 2008 and 2009, the market for Gigabit Ethernet switching is expected to surge with the proliferation of cloud computing and virtualized data centers.

Arista is not without competition, though. Cisco and Juniper are the big players, respectively, with Force10 Networks, Extreme Networks, and Blade Network Technologies (BNT) also in the mix. One vendor Arista won’t have to worry about is Woven Networks, which closed its doors earlier this year.

That’s still a big field for a recession-hammered market inclined to defer upgrades as long as possible. Nonetheless, Arista has hit the streets with an impressive price-performance edge over the major players and a technology advantage over most of the smaller fry. Overall, Arista seems well positioned to survive a shakeout, if not to rule the roost.

What troubles me about the company — and it’s a relatively minor cavil — is that it seems to have a divided market focus. Although the company says its all about the trademarked term “cloud networking,” which denotes the next-generation networking required for data-center cloud computing, its focus seems to vacillate between high-performance computing — which, for the most part, is known and limited market quantity — and the untapped promise of cloud computing.

Finally, with all the obvious links that Arista has to Google, why hasn’t the latter shown up on its customer list? Maybe that announcement will be forthcoming at a later date.

Google Acquires Video-Compression Vendor On2 Technologies

Google has announced an acquisition of video-compression vendor On2 Technologies. The deal, a stock-based transaction, will be valued at approximately $106.5 million.

As we all know, Google is a leading practitioner of what has come to be called cloud computing. As video streaming becomes more prevalent, and expectations surrounding its performance rise along with its rate of utilization, Google doubtless wants to incorporate the sort of technical advances that will enable it to maintain market leadership.

Google has YouTube, of course, but it also incorporates videoconferencing and other streaming video into a growing number of its applications and services, including Gmail.

Said Sundar Pichai, Google vice president of product management:

“Today video is an essential part of the web experience, and we believe high-quality video compression technology should be a part of the web platform, We are committed to innovation in video quality on the web, and we believe that On2’s team and technology will help us further that goal.”

On2 has three primary product offerings: On2 Video (advanced video compression), On2 Encoding (video encoding and publishing), and On2 Embedded (comprising solutions for chips and devices). It will be interesting to see whether the latter property and its technologies get prominently featured in Google’s relationships with its Anroid and Chrome OS hardware partners.

Additionally, On2 has something called On2 Flix Cloud, a web-based transcoding service designed to reduce the cost, complexity, and time of converting digital video for the web, IPTV, HD, and various devices. That also looks like something from which Google might be able to derive value.