What's Eating Cisco? 10 Clues All Is Not Well

What's Eating Cisco?

Cisco's been the talk of the tech industry this week thanks to an unusually candid message from CEO John Chambers, saying Cisco has disappointed its investors, confused its employees and lost some credibility in the market. The tone of the note -- and Chambers' promise of changes to come -- have both Cisco channel partners and investors alike wondering just how Cisco is planning to shake things up.

Chambers' memo, of course, hasn't been the only sign that something's amiss inside Cisco. Here are 10 clues from recent months that suggest change is in the air in San Jose.

John Chambers Said So

The most obvious sign something is amiss at a major tech vendor? When a CEO known for his relentless enthusiasm and powerful optimism tells his employees exactly that: something is amiss. In a letter to Cisco employees this week that set much of the tech world buzzing about its implications, John Chambers said that aspects of Cisco's current "operational execution" are flawed, and admitted that Cisco had disappointed investors, confused employees and lost some credibility in the market. Changes are coming: "Cisco will make a number of targeted moves in the coming weeks," Chambers said.

Cisco partners appreciated the letter's candor and honesty, though it also left many wondering why Chambers wasn't so candid during his keynote address at the Cisco Partner Summit last month.

The Numbers Don't Lie

Cisco's quarterly earnings reports have been less and less encouraging, and after its November report raised eyebrows with talk of "air pockets" and "surprise," Cisco's most recent report -- for Cisco's fiscal Q2, delivered in early February -- brought red flags, even among Cisco's most bullish champions. The numbers in question? Cisco's quarterly profits were down 18 percent ($1.5 billion as opposed to $1.9 billion a year ago); switching, which accounts for nearly a third of its revenue, fell 7 percent in the quarter; and Cisco's guidance ranges for Q3 and Q4 are between 4 and 6 percent and 8 and 11 percent, respectively, both well below Cisco's oft described growth target of 12 to 17 percent.

Cisco's revenues were up 6 percent year-over-year, and growth across its newer categories, like data center and collaboration, has been superb. And in fairness, Cisco isn't exactly a financial Titanic posting numbers like these. But with ongoing softness in its core businesses, consumer and government sales, it's hard to paint a completely pretty picture of the oft-analyzed networking titan.

Attack From All Sides

Cisco's switching revenues declined year-over-year, and Cisco archrivals like HP are wasting no time trying to close the market share gap. HP, in particular, has been aggressively challenging Cisco on the networking front, from competition-baiting promotions like "Catalyst for Change" to bold pronouncements and trash talk from the keynote address stage.

HP's Dave Donatelli told HP VARs last month that HP has successfully recruited a number of Cisco Gold partners, and that thanks to its 3Com acquisition, HP Networking grew 183 percent in the first quarter. "Today we are the number two in worldwide global share in networking," Donatelli said. "We are growing. The leader is shrinking."

In one sense, it's a lot of chest-beating and saber-rattling. But the gap between HP and Cisco, VARs say, is definitely closing.

Adjacency Angst

Cisco's Chambers and his top lieutenants speak often about the "30 adjacencies:" those markets, be they vertical industries or technology segments, where Cisco can be and intends to be a top player. In a recent interview with CRN, Chambers said he acknowledged partner angst over so much to choose from, and urged Cisco VARs to specialize and not try to be all things to all people.

"The good news is, it's a portfolio play," Chambers said. "And the portfolio will come together every time, so you can reconnect at a future time."

That's done little to calm the fears of some partners, however, who contend Cisco's "30 adjacencies" have distracted it and that VARs who can do more are the ones that are automatically more favored. "If you're a standalone video partner who does nothing but video integration, and you don't do broader U.C., I don't see how they're going to want to favor you," said a senior executive at an East Coast Cisco VAR. "They want the partners who can and will do it all for Cisco, and drive it all."

A New No. 2?

One of Cisco's most telling moves in the past three months was an executive appointment: the promotion of Gary Moore to chief operating officer. Moore, who was most recently executive vice president, Cisco Services, continues to report directly to Chambers, and Cisco did not previously have a COO position. In the role, Moore will be responsible for engineering, marketing, operations and services organizations, and according to Chambers' mea-culpa company memo, Moore's role was created to "expedite" simplifying the way Cisco works, how it focuses its attention and resources, and how it manages its operations.

Is Moore Chambers' new heir apparent? Cisco isn't saying, but it hasn't stopped tongues from wagging that it's the first time Cisco's had a real No. 2 to Chambers since Charles Giancarlo left Cisco in 2007.

Consumer Shakeup

Cisco's Consumer Business Group saw a 15 percent revenue decline during its second fiscal quarter, so it was likely there'd be some fallout. But a shake-up is indeed a shake-up: Jonathan Kaplan, Cisco's senior vice president and general manager (pictured), consumer products, exited the company, and the Consumer Business Group was brought under Marthin De Beer, senior vice president of Cisco's Emerging Technologies Business Group and TelePresence Business Group. That puts De Beer, widely respected inside Cisco and among channel partners, on the hot seat for wringing growth out of everything from Flip cameras to Linksys and Valet home networking products and Cisco's Umi home telepresence line.

Executive Exits

Can't really call it an exodus (not yet anyway), but the rate at which top-level executives and channel-facing managers have been departing Cisco in recent months is definitely noticeable. First came Tony Bates, Cisco's former senior vice president, enterprise, commercial and small business group, who bolted Cisco to take over as CEO of Skype. Then, earlier this year, Susan Bostrom, Cisco's executive vice president and chief marketing officer, announced she would step down. And in the channel executive team, the loss of channel marketing guru Luanne Tierney, who jumped ship for a similar role at Juniper, is being keenly felt among Cisco's channel brass and its partners. Just this week came another: collaboration chief Debra Chrapaty, who exited for games maker Zynga.

Stock Decline

Stock price isn't the only indication of a publicly-traded company's health, but it's certainly telling. And lately, Cisco's hasn't been much to write home about, with shares of Cisco down more than 15 percent from the end of calendar 2010, and about 30 percent this year versus a year ago. On Feb. 10, the day after Cisco released its financial results for Q2, its stock price fell more than $3, hitting its lowest level since July 2009 and continuing to erode over the following month and a half.

Millions Squandered?

Sure it wasn't a major new product line the way, say, TelePresence or UCS was a major new product line, but Cisco's decision to eliminate Cisco Mail was telling. Cisco Mail, a hosted e-mail product that Cisco first unveiled in a collaboration product blitz in 2009, was well-received, but isn't a "long-term differentiated element of [customers]' collaboration strategy," said Cisco's Debra Chrapaty at the time. Any big tech company worth its salt needs to experiment and is going to have some misfires; just look at Silicon Valley darling Google's track record. But Cisco's investment in the email product, said to be in the neighborhood of $250 million, wasn't exactly small.

{C}

Supply Chain Fallout

It's been a year now since the worst of Cisco's supply chain woes, but channel partners have long memories, and the product lead time issues that plagued the Cisco channel -- as well as other vendors' -- for much of 2009 and 2010 aren't soon to be forgotten.

"I want to apologize for the lead times last year and communications with the partners," Chambers told CRN in February 2011. "We clearly hurt them and hurt ourselves and hurt our customers, and it took us too long to fix it."