Daily Archives: February 4, 2010

Cisco’s Flat Security Business

In my post earlier today on Cisco’s latest quarterly results, I mentioned in passing — one line, really — that Cisco’s security revenue was flat.

Jon Oltsik, a principal analyst at Enterprise Strategy Group, expounds on Cisco’s inability to boost its security revenue.

He mentions that other vendors — Check Point, Juniper, Symantec, and McAfee — are growing their Internet-security businesses. Explaining the discrepancy, Oltsik suggests that Cisco has taken its eye off the security ball, diverted and distracted by other priorities.

Security was one of the advanced technologies Cisco targeted for sustained growth. It’s entirely possible, as Oltsik suggests, that Cisco’s security-related quarterly results are lagging because of benign neglect and diffusion of strategic focus.

I know Cisco hasn’t given up on security, which is integral to the availability and integrity of its customers’ communications and operations. What’s more, Cisco is extending its security portfolio into new areas, such as smart grids. Nonetheless, Oltsik is correct in noting that other security vendors have outperformed Cisco recently.

We’ll have to see how the networking giant responds.

Former VP Laments Microsoft’s Corporate Culture

After reading the op-ed piece by Dick Brass, a former Microsoft vice president, at the New York Times earlier today, my first reaction was that the headline was wrong.

The headline read: “Microsoft’s Creative Destruction.”

But, if Brass is to be believed, there was little creative about the internal destruction wrought within Microsoft. Those familiar with the term “creative destruction” will know that it refers to a process of transformation that accompanies radical innovation. Creative destruction is caused by innovation that displaces and disrupts established businesses, industries, technologies, and value chains.

But what happened at Microsoft, according to Brass, was destruction of creativity, which is a different matter entirely.

It typically offers none of the salutary benefits attributable to creative destruction. There’s no upside to it. The established order, which should be challenged and toppled by innovators and new ideas, grows infirm on its throne, until eventually it dies, its kingdom slowly fading into an impoverished dystopia marked by complacency and pervasive cynicism.

Is that Microsoft’s destiny? I wouldn’t take such a harsh view, though clearly Microsoft has failed repeatedly to set sail for lucrative markets. Yes, Microsoft has its internal rivalries and divisions; but Brass himself admits that’s also true for most large companies. It’s certainly true for nearly all of information technology’s major players.

Brass seems to suggest that it’s a particularly virulent problem at Microsoft. Brass perceives arrogance and even spite in the decisions of Office and Windows VPs who spiked innovations that originated from groups under his leadership. Perhaps it’s true that the people who ran Microsoft’s cash cows were exceptionally mean-spirited and vindictive, eager to bully nominal peers who ran smaller parts of the company. It’s possible, I suppose, but it’s probably not the whole story.

I’ve said here before that Microsoft doesn’t have the best handle on what consumers want or need. As I read Brass’ op-ed piece, I was struck that he led groups involved with consumer-oriented products such as tablet PCs and e-books.

No wonder he met resistance. That resistance existed not because Microsoft’s top executives were controlling or petty or malicious, but because they just didn’t have a good feel for what consumers might like.

At one point, Brass enumerates consumer products and markets where Microsoft failed to make a meaningful impression. Brass might be right about Microsoft’s “dysfunctional corporate culture” contributing to the problem, but I also believe that Microsoft, in its core DNA, is congenitally unsuited to the task of understanding and serving consumers.

Cisco: Results Impress, Guidance Encouraging, Challenges Remain

Cisco announced encouraging second-quarter financial results at the close of trading yesterday. It also provided robust guidance for the quarter ahead, even if its optimism was of an understandably cautious vintage.

In the technology space, Cisco CEO John Chambers and his team rank near the top in the way they deal with the analyst and investor community. Cisco set up this “market beat” perfectly, and it struck the right tone regarding outlook. Really, Chambers and company are masterful in how they prepare for and execute these quarterly calls with analysts and investors. These calls are like performances, in that a lot of preproduction work goes on behind the scenes before the event itself.

Not that there’s any sleight of hand in Cisco’s actual results, though. The numbers were solid. As Cisco said, quarterly results were relatively strong across product lines, industry sectors, and geographies. Some were better than others, though, and I’ll touch on that later.

Cisco is happy enough with its results and, more important, with its business prospects that it will begin hiring in anticipation of continued growth in established market segments as well as in sectors that are relatively new to the company. All told, Cisco will add from 2,000 to 3,000 positions, though we don’t know where in the world those jobs will materialize or how they’ll be apportioned departmentally. We can keep an eye of the Cisco employment board to find out.

The networking giant signaled that it will be aggressive in partnerships and acquisitions, too.

After trending downward for a few quarters, Cisco’s operating cash flow spiked on both a sequential and year-over-year basis, with the company now holding cash and cash equivalents of more than $39.6 billion. A caveat is that most of that money — about $35 billion, by my back-of-envelope estimation — is held overseas. Cisco is unwilling to repatriate that money, and to incur attendant taxation, so it probably will seek purchases in foreign markets wherever possible.

Cisco obviously hopes that its stock will become more attractive as acquisition-related currency. Cisco is talking up the recovery, which the company says has entered a “second stage” (though those of us who weren’t playing the public markets might have missed the initial stage entirely). It also has continued its share-repurchase program. Obviously, to accept Cisco stock in lieu of hard cash, target companies and their backers would have to be confident that Cisco’s shares will appreciate rather than languish.

We know Cisco beat the Street’s expectations like a rented mule. It beat even the high-end revenue and earnings estimates of analysts. What’s more, it issued bullish guidance that was ahead of consensus projections from the analyst community. It’s all good, right?

Well, it’s good for now. That said, the price of business success is eternal vigilance, and Cisco must remain alert to both threats and opportunities. It must also be able to distinguish between the two.

Blemishes included a modest dip in gross margins and faltering performance in Europe and emerging markets (not including India and China, the latter where Cisco is reorganizing to position itself for better results against China’s homegrown Huawei and 3Com, which has a huge Chinese workforce as a result of its earlier partnership with Huawei).

Also of concern is Cisco’s nominal growth in its “advanced technologies” segment, which includes many of its emerging businesses in so-called market adjacencies. Revenue in advanced technologies grew just one percent in the quarter on a year-over-year basis.

Cisco will place considerable emphasis on improved performance in these segments, which represent the company’s future growth. Cisco saw some long-deferred equipment upgrades and refreshes from its North American enterprise customers in the just-concluded quarter, but it will need to sell them new products as well as replacement gear to drive meaningful, sustained growth.

Fully aware of this conundrum, Cisco must be concerned to see its video business down 12 percent. This puts the Tandberg acquisition into an interesting new light, explaining why Cisco heralded it when first announcing it back in October and why Cisco was disinclined to walk away when a significant percentage of Tandberg shareholders banged their fists on the table and demanded a sweetened offer.

Other areas of Cisco advanced technologies that were down include application networking, the networked home, and storage. Security was flat.

On the positive side, unified communications was up a whopping 17 percent, and wireless grew in high single digits. Chambers also reported that enterprises have responded favorably to the company’s Unified Computing System (UCS), with more than 400 customers placing orders.

I’m sure we’ll see Cisco working hard organically and through acquisition to get all its advanced technologies performing as well as its unified communications and wireless groups. It also will continue looking for more market adjacencies.