Cisco gears up to capitalize on Splunk deal, AI revolution

Supply chain challenges. A February announcement that 5% of the workforce was being laid off as part of a global restructuring. Revenue in the latest quarter declining 13% (27% in networking) compared to the prior year. Net income dropping 41% year-over-year. Stock price stuck in neutral while the rest of the market hits record highs. Shakeups in the C-suite.

What’s happening at Cisco Systems? Is this just a minor hiccup for the dominant player in enterprise networking or something else? Has Cisco gotten too big and unwieldy to compete against innovative disruptors like Arista, Palo Alto Networks, Netskope, Zscaler, and others? Can it catch the next wave of AI and generative AI, or will it be left behind?

Vijay Bhagavath, IDC research vice president for cloud and data center networks, cautions against overreacting. “Cisco is not a new company. They’ve been around the block,” says Bhagavath. “They’ve had good quarters and not-so-good quarters.”

He explains that Cisco has methodically worked through its supply chain issues, which at first delayed order fulfillment and then swamped customers with more products than they could digest. Now that order patterns are returning to normal, Bhagavath says, “As we head into the rest of the year, in my lens, it’s looking positive.”

However, the supply chain issues could be viewed as a minor blip compared to the more fundamental problem that Cisco faces: Networking, the source of the majority of Cisco’s revenue, is no longer a high-growth market, and agile new competitors are nibbling away at Cisco’s market share. Even with supply chain bottlenecks in the rearview mirror and revenue from the Splunk acquisition factored in, Cisco is only predicting revenue growth in the low-to-mid single digits in its 2025 fiscal year. (Cisco’s 2024 fiscal year ends on July 31.)

Strategic plan takes shape

But that’s not to say Cisco hasn’t mapped out an aggressive, multi-faceted strategy for long-term revenue growth. It starts with the $28 billion acquisition of Splunk, a bold move that adds $4 billion in annual revenue to Cisco’s roughly $55 billion base. More importantly, it creates revenue-generating opportunities across a variety of fast-growing markets: security, observability, data analytics, AIOps, and genAI.

It’s also a powerful statement: Cisco isn’t standing pat, and it isn’t afraid of placing a big bet on AI. Forrester analyst Carlos Casanova says, “I think this acquisition presents a great opportunity for the combined company to excel in many directions and become legitimate leaders in multiple markets.”

Gartner analyst Jon Forest adds, “They want to be much more than a networking company as far as selling boxes and licensing software. They want to be a data company too, not at the expense of networking, but in addition to it.”

He points out that Cisco has gone through numerous evolutions in its history, from a product company to a software company to a cloud company to a platform company and now to a data company. “That’s what Splunk brings; the ability to process, report on, and analyze data more and more as we get into the genAI space.”

Cisco’s game plan for revenue growth includes these specific areas:

• Hyperscalers: Cisco is well-positioned (through a key partnership with GPU-maker Nvidia) to provide the hyperscalers with the networking infrastructure that runs their AI-driven data centers.
• AIOps: On the enterprise side, Cisco is integrating AI across its existing product lines in areas like AIOps.
• Splunkification: Cisco has identified 5,000 of its customers who have no Splunk products at all, so that’s an opportunity to cross-sell and create additional revenue.
• Security: Despite its best efforts, security has been an underperformer for Cisco. Gartner’s Forest says security only contributes 7% of Cisco’s total revenue, so there’s clearly an opportunity for growth there.
• Observability: Another potential high-growth area that has underperformed and should benefit from the Splunk deal.
• Enterprise data centers: Enterprises have yet to significantly invest in on-prem, GPU-based compute resources for AI/genAI, but Cisco wants to be first in line when they do, with an “AI in a box” Ethernet-based solution.

Of course, before Cisco can reap the benefits of the Splunk acquisition, it will need to do the integration work, something with which Cisco has had some challenges in the recent past.

Chinks in the armor

As the dominant player in networking for decades, Cisco has built up an aura of invincibility based on a tried-and-true strategy of staying ahead of any and all technology shifts by snapping up innovative young companies and integrating them into the fold.

Starting with Crescendo Communications in 1993, Cisco has purchased more than 200 companies. Some of the recent highlights: Viptela for SD-WAN, Meraki for wireless and cloud management, Sourcefire for IDS, Duo Security for authentication and identity management, ThousandEyes for network intelligence and digital experience monitoring, and AppDynamics for observability.

Bhagavath says, “They’re not a rookie company or a company not used to acquiring companies and their assets. Their whole business model is built on acquiring companies. They have the integration playbook.”

Still, as solutions become more complex and customers look for integrated platforms that combine security and networking in areas like SSE or SASE, Cisco’s integration playbook sometimes comes up short. 

One of the most persistent complaints is that its overlapping product lines can be confusing to customers. Forest says that Gartner clients report: “Cisco has all these products, but they don’t integrate well, even within the same market,” such as wired and wireless LAN (Catalyst/Meraki). “Customers also say the solutions are complex and can be difficult to operate,” he adds.

Cisco watcher Zeus Kerravala, principal analyst at ZK Research, points out that, until recently, the Meraki, Catalyst, and Viptela product lines each had their own management tools and dashboards.

Forest says Cisco is keenly aware of these integration issues and is actively working on them, but he describes Cisco’s efforts as “a work in progress.”

On the other hand, IDC’s Bhagavath, who has an insider view as a former Cisco exec, downplays the product line overlaps, pointing out that “purchasing centers in most companies are segmented along Cisco product lines,” such as data center, Wi-Fi, security, etc. With different teams buying different types of products, the overlaps aren’t that significant, he says.

Casanova says the integration with Splunk won’t be easy. “The deal closed faster than many expected, which implies that the leadership of both companies are on the same page and have been working closely for a smooth transition. The sizeable layoffs to both Splunk last year and Cisco this year, however, could wreak havoc on a workforce concerned about their jobs in a merged organization, so some disruptions should be expected as the transformation works itself out.”

Market share erosion

Cisco has been the undisputed market share leader in switches and routers seemingly forever, so it came as a bit of a shock when the Dell’Oro Group reported in March that Arista had edged past Cisco in the data center switch market in the fourth quarter of 2023.

According to Sameh Boujelbene, vice president at Dell’Oro Group, “Arista recorded the highest revenue share gain during the quarter, claiming the leading revenue position for the first time, ever.”

Worldwide tracking data from IDC paints a similar picture. In 2023, Cisco’s Ethernet switch revenues increased 22.2% year over year, with data center switch revenues rising about 10%, and campus and branch switch revenue increasing nearly 30%. Cisco’s total Ethernet switch market share was a solid 44% for 2023, while its combined service provider and enterprise router revenue rose only 1.4% for the full year, putting it at 36% market share.

But competitors are gaining ground. Arista’s Ethernet switch revenue jumped 35% for the year, to reach 11% market share. HPE’s increased 68% for the year to hit 9% and the combined HPE/Juniper market share, when that acquisition is finalized, will also be double-digits.

For a bit of historical perspective, 10 years ago Cisco’s Ethernet switch market share was 61%, according to the IDC tracker.

The revenue picture

In May, Cisco announced that revenue declined 13% year-over-year in its latest quarter—the worst decline since 2009. And that figure would have been 16% without Splunk revenue added in. Even more troubling, networking revenue, Cisco’s core business, tumbled 27%.

Cisco explained that the precipitous decline was an aberration that reflected the surge in order fulfillment at the same time last year, when the supply chain opened up, followed by a slow period in which customers were busy digesting the new inventory. Cisco says that going forward, order cycles will return to normal.

The problem for Cisco is that ‘normal’ in networking hardware is not a strong growth market anymore. Says Bhagavath, “It’s single digits and that’s okay.” The growth areas for Cisco, he adds, are security, analytics, and AI.

Other areas of the company aren’t exactly setting the world on fire, either. Security revenue (excluding Splunk) only grew 3% in the latest quarter. Product revenue for collaboration, another potential growth area that has underperformed, was flat. And observability grew a healthy 14%, but from such a low base that total revenue was only $211 million.

Competitive landscape: Knives out

Competitors—many of them pure-plays in either networking or security—are taking direct aim at Cisco. Arista, a longtime thorn in Cisco’s side, is winning market share at the high end of the data center switch market.

The HPE/Juniper combo is also expected to present a heightened competitive threat to Cisco in the wired and wireless LAN market, if HPE can whip together the Aruba and Juniper product lines and sprinkle some Juniper Mist AI dust on top. On the security front, Palo Alto, CrowdStrike, Zscaler, Fortinet, and others provide stiff competition.

Gartner’s Forest says Cisco is somewhat at a disadvantage because, as the incumbent, it has to play defense across multiple markets. And it has to support all types of customers, the forward-leaning ones looking for the next-best thing, but also the slower-moving, more risk-averse customers.

He adds, “Cisco hasn’t been the kind of vendor to be at the forefront of these transitions. Other vendors are offering disruptive new models and markets and ways that services are consumed. Sometimes, they’re not the fastest to adapt.”

Casanova agrees, adding, “Both Cisco and Splunk have had some struggles with innovation in the past few years, but this combination is an opportunity for them to dispel those characterizations.”

Positioned for growth

Despite the challenges associated with being the longtime incumbent, Cisco—with the Splunk deal, some key personnel changes, new strategies, and new attitudes—is making moves to position itself for continued success going forward. 

Kerravala points to the appointment of Executive Vice President Jeetu Patel to run the security business unit as a key moment. The portfolio has been revamped and reorganized under the Cisco Security Cloud umbrella, which now consists of suites rather than point products.

In a recent conversation with analysts, CEO Chuck Robbins asserted that Cisco today has “zero overlap in security.” He added that the company has a solid integration plan in place to bring Cisco’s AppDynamics observability tool into Splunk. “We’re taking the data platform they have and applying our high-end AI-based detection and response to give customers the ability to identify threats and dynamically react to threats in real time,” Robbins says.

And Cisco is bringing new products to market. It recently announced a new security fabric called HyperShield that uses AI to protect applications, devices, and data across hybrid cloud infrastructures. “This is not a product, but a new architecture—the first version of something new,” said Patel.

Kerravala adds that Jonathan Davidson, who was named executive vice president of networking products in August 2022, addressed the “swivel chair” management problem head-on, resulting in the 2023 release of Cisco Networking Cloud, which enables customers to control assets from a single cloud-based interface.

On the AI front, Robbins says that “three of the top four hyperscalers are deploying our Ethernet AI fabric,” and he predicts that pilot projects currently underway and other sales opportunities that Cisco calls “line of sight” will deliver $1 billion in orders in fiscal 2025 and multiple billions beyond that.

Speaking to J.P. Morgan analysts recently, Cisco CFO Scott Herren explained that Cisco had to make an attitude adjustment to win over the hyperscalers. “If you go back to the original buildout of the big compute and storage infrastructure a decade, Cisco had the mindset of, ‘No one knows more about networking than we do, so buy what’s on the truck.’ And the hyperscalers said, ‘That’s not the way this is going to work. We’ve got our own designs. We’ve got our own architecture.’ So, we missed that initial wave of buildout.”

Cisco went back to the drawing board, acquired Leaba Semiconductor, started building its own chipsets, and racking up design wins from the hyperscalers for specific items like its 51.2 Tb/sec G200 Silicon One switch ASIC. 

“We went back to the hyperscalers and said, ‘Look, we’ll meet you where you are.’ And that’s what led to pretty rapid growth within our service provider business.” Herren adds, “We are far better positioned to catch the initial wave and then, obviously, the subsequent waves of the buildout of the AI infrastructure than we were when the initial compute infrastructure got built out.”

According to Forest, the opportunities for Cisco are laid out in front of them—in security, SASE, observability, data analytics, AIOps, and genAI. He said Robbins and his team (which now includes former Splunk CEO Gary Steele as Cisco’s President, Go-to-Market) “are trying to be aggressive and to expand to other areas that are adjacent and relevant to their core business. They’re trying to change the dynamics of the company.”

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