Thursday, November 14, 2013

More Thoughts on Cisco and the New IT

We've been thinking about 'big data' in many posts, and it is now one of the common buzzwords on the lips of most tech CEOs, institutional investors, and analysts. This phrase, along with many others, such as 'software defined networks,' 'virtualization,' 'SaaS,' and 'the cloud,' mean that IT is undergoing a fundamental shift in the way that customers interact with technology, corporations use data, and buyers evaluate and pay for IT equipment and services.

So, is this sea change the reason that the Four Horsemen of Tech--IBM, Microsoft, HP, and Cisco--are struggling with top line revenue growth and earnings?  Is this why their shares sport historically low absolute and relative multiples?  It could be, but it seems as if there's something wrong with the market's view, as there was during the Internet bubble and during the Y2K crisis-that-wasn't.

Companies in other, more prosaic industries deal with the slow death of their cash flow rich businesses, and the better companies adapt or reinvent their portfolios.  Think about the check printing business for financial printers like Deluxe, Merrill Corporation and John Harland.  Who writes checks?  I use my iPhone and so on, yada yada.  Well, Deluxe has done quite well by branching out into search engine optimization, brand identity, and e-marketing, while still maintaining a check business that is providing cash for an array of financial services.  The Four Horsemen should be able to navigate their industry change, but some are playing a stronger hand than others, but this fact alone won't determine who will take the pot at the end.  That's why stock picking is an art.

Today, in the aftermath of Cisco's sell-off for poor guidance, I read one analyst who essentially said that Cisco was finished because of their dependence on selling high margin gear for an evolving system of software defined networks. The analyst is being myopic just as the banking analysts were who said checks are going away. Cisco management admitted on their call that they realized three years ago that they had to prepare for a major product line shift in their core business, and it is underway in the most recent quarter.  They may take a while to get it right, but having a huge market place presence and a fortress balance sheet is a strong hand for Cisco to hold.

Looking at Cisco's board, I noticed that Dick Kovacevich, the retired CEO of Wells Fargo is a director. Dick made an extremely challenging "merger of equals" work through regulatory, economic, operational, cultural and management challenges.  Wells Fargo was, and is, a bank that had consistently made large investments in technology.  Having the perspective of a financial services buyer on the board is extremely valuable; plus, I know from seeing him operate on the board of one my employers that he is a man of integrity with a strong sense of duty and loyalty to his shareholder constituency.  There are other strong directors who know tech from a different angle, like Marc Benioff and Arun Sarin who provided innovative software and hardware to customers.

Thinking about the "big data" opportunity, it isn't clear that any of the Four is building an insurmountable lead, because the nature of the opportunity, like every market, will have layers and segments which will require different business models and capabilities.  On the high end, for users like the U.S. government and its agencies, and for big university research systems, IBM and Cray Research have established positions and they compete with NEC, Hitachi, and other competitors.  Companies like HP and Dell who want to pursue this opportunity will come into it by building inexpensive high performance computing machines from commodity parts, thus analysts say undercutting margins for products like IBM's Watson and Cray's XC30-Cascade.  I doubt that the buyers will look at their decisions in this simplistic way, but we'll have to wait, see and learn.

HP went and bet the farm on buying an analytic engine through Autonomy.  This may or may not be enough, but they recklessly overpaid. Cisco, meanwhile, is really making a big run at network security and this opportunity can probably be more financially rewarding, faster than the big data opportunity.

Finally, IT buyers are not like Wal-Mart buying shampoo.  The CIO reports to someone who can put her out of a job for a catastrophic failure or a loss of confidential personal or financial data that invites regulatory bodies in for fines and civil lawsuits.  CIOs like meeting their peers and talking about they have recently implemented the 'next big thing.' I have lived through millions being wasted on business intelligence software, digital dashboards for real-time analytics, and data centers with robotic arms to swap data cartridges for IBM and Hitachi mainframes.  None of those CIOs pinched pennies.

Here is an example from a real life customer which is implementing a very large scale super computer project in Japan.  The Railway Technical Research Institute is dealing with a train system that is the transportation backbone for the country, where an unanticipated seismic event affecting bullet trains with several hundred passengers would be catastrophic.  In this case, a provider who could provide experience and a tightly integrated system capable of handling thousands of processors and a tested analytical engine got the bid.  The market for high performance computing and big data will definitely have segments in which many players can participate.


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