Cisco's brave new world
As virtualization and its effects ripple through enterprises at breakneck speeds, we're seeing some companies better positioned to capitalize on trends emerging from this technological shift. The undisputed king of networking, Cisco has made a number of moves to solidify its dominant position while it straddles two megatrends: taking advantage of an explosion of data that benefits its bread-and-butter business, and ensuring its own placement at the center of heavily virtualized data centers.
The most notable of Cisco's efforts, the Unified Computing System (UCS), aims to capitalize by combining in a single package all the elements of a virtualized data center: virtualization, processing, storage, and networking. However, the gambit's not without its risks.
Taste the hurt, Cisco
Cisco's move ruffled the feathers of notable partners like IBM
With Cisco's attentions increasingly focused on non-core areas like video conferencing and UCS, and with its partners branching out to competitors like Brocade
Beating back the horde
However, recent data from researcher Infonetics shows that Cisco is stemming the tide:
The data center Ethernet switch market, including general purpose, purpose-built, and blade switches, increased 16% to $1.16 billion in 1Q10, on the heels of a very strong fourth quarter. Strong quarterly growth in the data center switch segment was due primarily to Cisco, which increased its data center Ethernet switch revenue 23.5% in 1Q10 over 4Q09. [Emphasis added]
Contrary to recent trends, Cisco's back to gaining market share. According to JPMorgan analysts, the data-center switch market is only estimated to be about 30% of Cisco's total switching sales, but it's a good omen for switching equipment in general. Cisco's lock on Ethernet switching hasn't let up, despite fiercer competition caused by Cisco's moves into areas traditionally controlled by HP and IBM.
Yet the positive news didn't stop at Ethernet switching. Consider the trend in WAN optimization, from Infonetics:
Of the top WAN optimization vendors, Blue Coat was the only [one] with positive revenue results (up 7%).
WAN optimization might not be a household name yet (OK, it probably never will be), but it's an area that Cisco has struggled to crack. Simply put, the technology speeds up latency across networks, especially if companies have centralized servers. Small players like Riverbed Technology
Given that Cisco lags in what's seen as a growth market crucial to future networking needs, the decline in revenues at most vendors either means:
- WAN optimization has been overhyped, or
- The WAN optimization market is taking a breather.
In the first case, Cisco doesn't need to worry about a potential threat that might force a costly future acquisition. In the second case, it gets more time to catch up with competitors while the market slows down.
Lastly, it's worth noting that Cisco saw itself fall behind rival F5 Networks
We're still in the early stages of some radical changes to the data center, but Cisco's fortunes are looking good. Cisco could seize greater opportunities than other megacap IT companies, prompting me to keep an eye on the company. Continue to deliver, Mr.Chambers, and I'll keep believing you can keep the growth rolling, and help Cisco avoid becoming the next Microsoft.
Eric Bleeker owns shares of Cisco. Motley Fool Options has recommended a diagonal call position on Microsoft, which is a Motley Fool Inside Value choice. Try any of our Foolish newsletters today, free for 30 days. The Motley Fool has a disclosure policy.
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