 From the SiliconANGLE Media office in Boston, Massachusetts, it's theCUBE. Now, here's your host, Dave Vellante. Oh everyone and welcome to this week's episode of theCUBE Insights powered by ETR. In this breaking analysis, I want to look into Cisco. You know theCUBE is in Barcelona this week to cover Cisco Live. There's an expected attendance of about 17,000 people. Now today Cisco is a company in transition. Here remains a leader in key segments, but it's refocusing its business for the next decade, having exited a number of areas over the last several years. Allow me to briefly give you my perspective and review how we got here. Near the end of the dot com bubble, Cisco was the most valuable company in the world with a $500 billion market cap. It was one of the four horsemen of the internet. Remember that along with Oracle, Sun and EMC. Cisco really rose to prominence by betting big on Ethernet. Old reliable TCP IP was the lynchpin of the internet and allowed Cisco to power the wave that virtually decimated the mini computer industry in the 1990s. There were many levers that Cisco pulled brilliantly during its ascendancy. And I want to call out two big ones. First was it created an army of network engineers, literally hundreds of thousands of professionals trained on installing, configuring, managing and optimizing Cisco gear. Cisco created very complex solutions and thrived on this complexity and the Cisco certified internet work experts or CCIEs deeply understood the dark art of networking and Cisco was there beacon. The second was acquisitions. Under the leadership of CEO John Chambers, Cisco completed about 180 acquisitions over a roughly 20 year period. This enabled TAM expansion growth and maintained Cisco's relevance to customers who very typically and often were the generator of acquisition ideas. Cisco diversified quickly into a conglomerate with a portfolio that spanned video, set top boxes, telepresence, compute, collaboration, security, wireless. At one point Chambers talked about dozens of adjacent businesses each of which would account for a billion dollars of incremental revenue for Cisco. Many, if not most didn't pan out and Chambers slashed and burned prior to handing the reins over to current CEO, Chuck Robbins. Now under Robbins Cisco was a more focused company kind of going back to the basics. They're betting on what I would say are more sure bets including data center, wireless, collaboration, security and the edge. Cisco is also evolving its model towards software subscriptions. Now today I want to look at how some of those bets are performing. I'll discuss the impact of cloud on Cisco's business and then I want to drill into the performance in some areas like networking, collaboration, security and then close on hyper-converged. And then the last thing I'm going to do is share some things that I'm watching as barometers of success over the next 18 to 24 months. Now the first thing I want to do is give you a snapshot of Cisco's financials today. What this chart shows is some KPIs on a trailing 12 month basis. Cisco is about a $50 billion company with a $200 billion market value. That's a 4x revenue multiple which is pretty good for a company that's generally viewed as a traditional hardware player. Now Cisco is guiding analysts on a flat to down year and talking about a challenging macro environment despite the stock market's seemingly insurmountable rise. Cisco's a very profitable company with a 33% operating margin and a very nice 66% roughly gross margin. Cisco throws off a lot of cash around $15 billion annually in free cash flow. They make a big deal that 70% of its software revenue is now coming from subscriptions. The Cisco is mandating a new consumption model that is subscription based. Now it's somewhat hard to tell exactly how large Cisco's software revenue is, is they're opaque in that detail. But I'm pegging at between 11 and 12 billion by the end of this year today it's probably 7 to 8 billion. Cisco is riding some big waves adding software it's to its portfolio. Security grew at 22% last quarter. Wi-Fi 6, 5G, which by 2021 should start kicking in. It uses a chunk of its cash of course to buy back stock to keep the street happy and it's leveraging a leadership position to compete. Now finally I want to make some comments later actually on how they're approaching developers in a strategy that I really like. Now there are some headwinds that Cisco's facing namely cloud, this macro picture that they talk about which is not positive for them evidently. The company's overall complex portfolio, the competitive dynamics and the perception that they have an aging or that they are an aging hardware company and they're really still touting selling ports. So let's drill into some of the spending data and I want to start with this notion of leadership. This chart shows Cisco's position in its core networking segment. The chart depicts market share over time which remembers a measure of pervasiveness in the ETR data set. Now look at what happens. Look how Cisco maintains its leadership far outpacing the others in this networking sector each quarter. I'm going to make some comments on the sector overall but notice the net score in the blue bars which is a measure of spending velocity. It holds firm at 25%, not great but holding steady. And you can see the pie chart of the public clouds impact on the sector and I'm going to make some comments there later as we go on. But first let's look at the networking sector overall. ETR just released its January survey and here's what they said in their sentiment on networking. So when you see the networking space it's been sort of down for a while and ETR has been somewhat negative on the entire space but what this shows is really net score and which is spending velocity in the January 2020 results with previous periods within Fortune 500 buyers. And you can see there's an uptick in momentum for networking generally and Cisco is really cited as rebounding. But now look at the blue call out. It's from an ETR Venn discussion with an IT buyer who essentially says look as we move to the cloud we are going to spend less on networking here and given that Cisco is the leader we want to understand how the public cloud is affecting Cisco's networking business. So to answer that what I'm showing here is data from the latest ETR January spending survey and I'm filtering the data on organizations that are spending on AWS, Azure and Google Cloud Platform and showing Cisco's performance measured in market share or pervasiveness. You see that's what's happening now in these big cloud accounts. There's an end of 809 cloud customers and 480 Cisco customers within those accounts and you can see the impact that the cloud is having on Cisco much the same way it is affecting virtually every large supplier of on-prem infrastructure. A slow steady decline over the past 10 years. And you can see a net score which measures spending intensity in the upper right-hand corner of almost 30% which is somewhat lower than Cisco's average in the ETR data set. But the story is not just about cloud. There are other waves in the industry or what I've referred to in the past as innovation cocktail ingredients namely data plus AI plus cloud. So the next question I want to pose how is Cisco doing in leveraging these waves? So here we have 916 customers in these superpower segments of data, AI and cloud that are combined and we show the market share or pervasiveness over time of Cisco as compared to VMware's NSX, HPE and Dell EMC. What the data shows is a couple of points. One is that Cisco is the most pervasive competitor shown in these customer segments. Its net score is 37%. Four points higher meaningfully than the cloud only chart. Actually seven points higher than I showed earlier. Only NSX has a higher net score and relatively speaking NSX is much newer and should be growing much faster than Cisco so that makes sense. So I would say that Cisco is holding its own here. Its challenge really in my view is to use data and AI to create better customer experiences. So be a consumer of AI if you will as a means of better serving customers and compete in the multi-cloud market directly with these players and others none of whom own a public cloud. Okay so I spoke earlier about Cisco's portfolio so let's look at some of the ETR data and see how various parts of Cisco's business are doing. This chart shows the net score or remember spending velocity across Cisco's offerings and includes Meraki which is wireless. AppDynamics, AppD is application performance management. We're showing here Cisco overall. Cisco Umbrella which is cloud and DNS security and Springpath which comprises infrastructure for Cisco's hyper-converged offering. And as you can see the segments in which Cisco plays there are 10 in the ETR taxonomy spending analytics, security, mobile, device management, infrastructure, video conferencing, et cetera, et cetera. In the interest of time I will say just the following. Red is bad, green is good, and gray is neutral. And again Cisco is holding its own in these major segments with decent spending velocity. So now let's take a look in an area that I think is going to get a lot of attention in Cisco Live and that's collaboration. This ETR chart that I ran shows net score or spending velocity for video conferencing platforms. And you can see Cisco, it's got some work to do. It's got a teetering on the red zone. So I would expect some continued enhancements there. Now comparatively you can see go to meeting, losing steam and Skype really falling off a cliff in January, but look at Microsoft Teams. That blue dot with very, very strong momentum. So what Microsoft's doing is they're migrating Skype and link their install base to Teams in a really, really well-positioned there. And you can see as well newcomer Zoom is right there in the mix across this sample of 500 buyers. Now I want to turn your attention to a really important sector which of course is security. This chart that I'm showing here shows net score, again, spending velocity in the cybersecurity sector. And Cisco is both large and credible in this space. Its security business grew 22% last quarter as I said. It's at a 3.2 billion dollar run rate. So spending momentum maybe not as strong as Palo Alto networks which I'm showing here. And it's not as high as the rocket ship companies like CrowdStrike or Okta or CyberArk or SailPoint or some of the others that I've highlighted in previous breaking analysis episodes. But Cisco's pretty solid. And you can see the likes of IBM and Symantec by comparison, these guys are leaders in security but their spending momentum is in the red. So once again, this theme of Cisco as a large player who has credibility, this story is playing out. And clearly this is going to be an area of focus at Cisco Live. So this next data point is kind of interesting and looks at Cisco's data center business and specifically I'm trying to better understand what's going on in hyper-converged. The software defined platforms that bring together storage, compute and networking. Now the power of the ETR platform is that I can ask the question, how are the hyper-converged players doing inside of Cisco accounts? So what I've done is I've filtered on 458 Cisco accounts across three sectors, storage, compute and networking. And I've isolated on Nutanix, VMware's vSAN, Cisco itself and Dell EMC with VxRail. And what we're doing is we're showing net score or spending intensity, spending velocity. And the first thing to point out is that all of the vendors are in the green. And that's because this is a growing market that still has legs. Nutanix has noticeable spending momentum ahead of vSAN, ahead of Cisco and Dell EMC. Now here's the thing about Cisco. On the one hand it's putting forth its own hyper-flex platform based on the spring path acquisition. But it has to tread carefully because it partners with converged players like NetApp with FlexPod and IBM with VersaStack. And it's hyper-flex as an HCI play is essentially designed to replace converged platforms like these. Now the same is true for Vblock, the business with Dell EMC, the old VCE business, but Cisco and Dell are at each other's throats so neither really cares that it's replacing them. Okay, long segment, a lot to cover. I got to wrap, but I want to end by saying what to look for over the next sort of 18 to 24 months as barometers. First thing is the pace of transition to software. The second thing that I'm watching is the uptake of the new core announcement that Cisco just made for big routers, silicon and optics. This is Cisco's wheelhouse. And I expect that the 5G rollout in 2021 is really going to start to pick up and be a tailwind for Cisco. You know, the macro should be a concern. Cisco is saying it's business is soft, kind of across the board, there's China, there's Brexit, but the S&P is on fire. Now does that mean upside for Cisco? In other words, are they sandbagging a little bit or are there more fundamental structural or execution issues? Yeah, I think personally Cisco may have a little bit of upside here, but they're big and exposed. So that's something to watch. The other thing is the impact of cloud on Cisco's business and the company's ability to compete in multi-cloud, including how it embraces Kubernetes. Cisco, and I've said this before, has to position itself as the best, the most cost effective, the most secure and highest performance network to connect hybrid and multi-clouds. Now as well, the company's got a hold serve in the networking, which I fully expected to do. We're seeing a little uptick in Juniper, wrist is doing okay, but they're kind of smaller in the grand scheme of things relative to Cisco. Now the wild card here is VMware's NSX. So we'll be watching that and what impact it has. A lot of customers have both. Finally, I want to talk about developers. Cisco DevNet, as I've said many times, I really like what Cisco is doing there. I think they've outshone some of the traditional players. They are retraining hundreds of thousands of CCIEs to code in Python and really code Cisco infrastructure. So Cisco has an infrastructure as code strategy that's going to help propel them in multi-cloud, the edge, new workloads, and they're leveraging this engineering force that they have. So very long segment here. Watch the coverage at Cisco Live on theCUBE and on Silicon Angle. This is a big cheery company and a lot for me to swallow in one of these segments. So tweet me at Dvalante if I've missed something or comment on my LinkedIn feed, or you can email me at david.valante at siliconangle.com. Thanks for watching everybody. We'll see you next time on Breaking Analysis, the CUBE Insights, powered by ETR.