News

Cisco Financial Numbers Show SDN Is Paying Off

• By David Ramel
• 02/18/2015

Despite claims that new software-defined networking (SDN) technologies pose a dire threat to traditional networking powerhouse Cisco Systems Inc., the company reported strong financial results for its latest fiscal quarter, buoyed by strong sales of its own SDN vision, Application Centric Infrastructure (ACI).

Shortly after another analyst cautioned that "SDN is a secular threat to [gross margins]," Cisco results for its second fiscal quarter showed the contrary. And feisty CEO John Chambers made much of the news.

"We are pulling away from our competitors and leading in both the SDN thought leadership and customer implementations," Chambers said in an earnings call. "The market has recognized the benefit of ACI as compared to PowerPoint concepts of aspirational competitors."

SDN is a new and growing technology still shaking itself out, but it challenges the traditional networking model dominated by Cisco, with new open virtualization techniques emphasizing software that controls inexpensive commodity switches and other hardware. Experts say it has the potential to disrupt the proprietary, specialized-hardware approach of Cisco, which puts network "intelligence" into its more expensive switches.

Cisco has participated in more open SDN-related initiatives while championing its own ACI approach running on its new Nexus 9000 switches.

"We have seen the nexus 9K and ACI customers grow each quarter from 580 customers two quarters ago to 970 customers last quarter to 1,700 this quarter," Chambers said.

Overall, Cisco reported good numbers, with a 7 percent increase in revenue in its second fiscal quarter and a 68 percent increase in net income. It forecast more growth, raised its dividend and saw its shares rise on the market.

"ACI and APIC will become the cornerstone of the next generation of networking architectures for many years, much like the UCS has become in the data center," Chambers said. "I am particularly pleased that we have kept gross margins extremely stable in switching and have actually grown gross margins in many of our product switching areas, which were already very strong in new areas, such as the ACI portfolio."

But Kulbinder Garcha, the Credit Suisse analyst who forewarned about the "secular threat" of SDN, for one, didn't change his tone much. While acknowledging the better-than-expected numbers, he still warned: "However, we still believe that the secular impact of SDN will become more meaningful over the next 12-18 months, and retain our UNDERPERFORM rating."

In the earnings call, Chambers was as belligerent as ever in discussing disruptive threats and chief competitors in the new age of networking.

"VMware is a competitor," he said. "We view them as a competitor. We are going to beat them as a competitor and we will beat them and have fun doing it. I wish I was a better person, but I am not."