350-901 history - Developing Applications using Cisco Core Platforms and APIs (DEVCOR)

With a nearly $60 billion revenue run rate, growing at 14% and throwing off more than $5 billion in operating cash last quarter, Cisco Systems Inc. has an awesome business.

But customers are vocal about the complexity of Cisco’s portfolio and, if their concerns are not addressed head on, the company risks encountering friction beyond just economic headwinds. We believe Cisco’s challenges are most decidedly not product breadth and depth. Rather, the company’s mandate is to integrate the piece parts of its intricate offerings to create more facile and seamless experiences for customers.

In this Breaking Analysis and ahead of Cisco Live in Las Vegas June 4-8, we dig deeper into Cisco’s business and double-click on three key areas of its portfolio: 1) security; 2) networking; and 3) observability. We have spending data from Enterprise Technology Research and a guest appearance from SiliconANGLE contributor and market watcher Zeus Kerravala, principal at ZK Research.

Stocks of pure-play competitors outperforming Cisco year-to-date

Let’s start by doing some stock market comparisons.

The chart above shows year-to-date comparisons among Cisco, Palo Alto Networks Inc., Arista Networks Inc., Extreme Networks Inc. and the Nasdaq Composite. As you can see, the pure plays, as well as the NAS, are outperforming Cisco by a wide margin. That’s despite Cisco’s double-digit growth last quarter, 65% growth margins and a $200 billion market cap.

The reason is Chief Executive Chuck Robbins set modest expectations for 2024, which, when modeled out relative to Cisco’s longer-term outlook, suggest slowing momentum in the near- to mid-term. In addition, we believe the breadth of Cisco’s portfolio, while a key strength, also creates adoption challenges for the company’s customers.

What follows is a summary of how Kerravala interprets this data.

Kerravala sees this as a nuanced comparison between Cisco, a behemoth with an impressive cash generation capability, and smaller companies such as Arista and Extreme. Despite acknowledging the fair comparison, he suggests a lack of completeness, emphasizing that though smaller entities may capture the benefits of a market trend more swiftly, Cisco’s broad scope often hampers its ability to do so. But Cisco throws off more operating cash in a quarter than these companies generate in annual revenue.

He used the example of Zoom Video Communications Inc. and RingCentral Inc., noting how Cisco’s performance paled in comparison two years ago, but the tide has turned since then, with the unified communications sector waning, but Cisco thriving in relative terms.

Kerravala believes Cisco’s breadth and stability make it a safe investment bet, but its size prevents it from realizing the rapid growth that smaller, more specialized companies can. The broad spectrum of markets that Cisco operates in implies a reduced likelihood of success across all these fronts simultaneously.

Watch Zeus Kerravala comment on the comparisons between Cisco and the pure plays.

Cisco’s complex business remains anchored in core networking

The table below represents the contribution of Cisco’s lines of business as reported in its financials. As we said at the top, 14% revenue growth is pretty astounding for a company of Cisco’s size. With tough comps ahead, it’s unlikely Cisco can keep up this pace.

Networking makes up more than half of Cisco’s revenue, but the company is growing its software contribution, which is just under 30% today, and its annual recurring revenue accounts for more than 40% of revenue, which gives the company better visibility on the future. This all helps prop up Cisco’s alluring 65%-plus gross margin model, which unlike many of its large incumbent competitors has held up well over decades. Moreover, Cisco’s shift to a recurring revenue and subscription model has been executed quite well compared with many firms (some much smaller, such as Splunk Inc.), which have struggled with that transition.

To break this down further, examining Cisco’s 10-K provides the following added context:

Secure, Agile Networks comprise core networking, switching, routing, wireless and compute. This includes products such as Catalyst, Nexus, Meraki and Cisco’s software-defined wide-area network products.

Internet for the Future includes optical networking, 5G, in-house silicon and optics solutions. This includes products such as the Cisco 8000, NCS 5500 and ASR 9000 series.

Collaboration includes Webex and call center solutions.

End-to-End Security comprises network security, cloud security, endpoint, threat management and zero-trust solutions.

Optimized Application Experiences includes AppDynamics, ThousandEyes and Intersight.

Here are Kerravala’s thoughts on Cisco’s portfolio, the challenges they face and what’s needed going forward:

His analysis suggests that Cisco is challenged to create interoperability and cross-platform optimization despite its wide array of excellent products. He notes that even within Cisco’s own ecosystem, products such as Webex, Meraki and Catalyst do not necessarily provide a significantly better experience on Cisco’s network than competing products. Despite its ownership of Meraki for nine years, only last year did Cisco permit customers to view Catalyst devices on the Meraki dashboard, a development credited to the unification of the two lines under General Manager Todd Nightingale. Kerravala pinpoints political dynamics, internal friction and business unit structures as contributing factors to simpler execution.

In terms of future improvements, the consolidation of mass scale, Internet for the Future, and Secure Agile Networks under John Davidson should lead to better interoperability between the telecom and enterprise sides. Although Cisco possesses a portfolio of impressive products, including Kenna, AnyConnect, Talos, Meraki and Catalyst, these do not coalesce to form a comprehensive Cisco platform story.

However, steps are being taken to address this gap, such as the announcement of the XDR solution at the recent RSA Conference, Cisco’s first cross-security solution. Kerravala posits that Cisco’s focus should be on creating a synergistic portfolio where the collective value exceeds the sum of the parts, as opposed to having to compete fiercely on a product-by-product basis.

Watch Zeus Kerravala unpack Cisco’s vast portfolio and how they can simplify.

Spending data underscores the macroeconomic impact on Cisco’s overall business

The ETR spending data for Cisco, at a high level, shows what virtually all tech companies are facing: a decrease in the percentage of customers that are spending more relative to last year.

The candlestick chart above shows the granularity of Net Score, ETR’s proprietary spending metric that measures customer spending patterns. Of the 1,700 information technology decision makers in the most recent ETR survey, more than 1,000 are Cisco customers – so we have a nice sample. The lime green is the percentage of those customers adding Cisco new, the forest green represents those spending 6% or more relative to last year, the gray is flat spend, the pink is spending down 6% or worse and the bright red is churn. Subtract red from green and you get Net Score, which is the blue line.

You can see the steadily declining trajectory because of the gray and the reds increasing. The brown line is the pervasiveness in the overall data set, which has actually held up well. Cisco has a massive installed base and it is stable, although more customers are leaving than are being added within this survey. Remember, this survey doesn’t measure spending amount, only the percentage of customers in each bucket.

We asked Kerravala if this accurately reflects his view of the market and is the deceleration a function of economic headwinds, complexity or both? What follows is a list of his key takeaways:

• The competitive dynamics in the networking industry have significantly shifted, with Cisco now facing more formidable rivals such as Arista, Fortinet Inc., VMware Inc. and Extreme Networks.
• The entry of cloud companies and Aruba into the networking market introduces additional competitive pressures.
• These industry changes necessitate sharper sales execution from Cisco, as it can no longer rely on competitors’ missteps to retain its advantage.
• In light of this more complex competitive landscape, Cisco’s strategy must evolve to distinguish itself effectively and maintain its leading position.

I do think a lot of what you’re looking at there is more credible vendors are in market and that requires much sharper sales execution than it did before. Because Cisco can’t just show up and compete on the fact that the other companies are going to mis-execute, which is what they had the luxury of doing for a long time.

Watch Zeus Kerravala comment on Cisco’s spending momentum data in the ETR survey and the changing nature of the competitive dynamics.

Cisco’s center of gravity starts with core networking

Let’s drill into the segment data, starting with networks.

The chart above shows Net Score or spending velocity on the vertical axis and pervasiveness in the data set on the horizontal axis. The red dotted line at 40% indicates a highly elevated Net Score. We’ve highlighted Cisco overall and Meraki, a company Cisco bought in 2012 to help better control network devices.

As is evident, Cisco stands out as the clear leader here in both presence (X axis) with very respectable customer spending velocity on its products (Y axis). In fact, we saw earlier a 29% year-on-year revenue growth figure from last quarter in networking. That is amazing for such a large business. As Cisco works through its backlog, it creates uncertainty in the forecasts, but underlying demand for Cisco’s networking products is sound.

As well, you can see a number of other companies here, including Hewlett Packard Enterprise Co.’s Aruba, Arista, VMware with NSX and a number of others, including Cloudflare Inc., which all are hovering near the elevated 40% line.

Kerravala laid out his thoughts as follows:

He is critical of Cisco’s approach to its Meraki and Catalyst product lines, not on the merit of their features and value but on the lines between them. He asserts that customers should not have to choose between them. He suggests a unified hardware line that offers customers the flexibility to manage it either through Meraki or the command-line interface, or CLI. Currently, a switch from Meraki to Catalyst necessitates a complete hardware overhaul, a problem that could be resolved by a common set of hardware compatible with both management methods.

Further, Kerravala notes that Cisco’s potential to integrate data center, campus and Wi-Fi certifications to Improve the user experience has yet to be fully realized. While some integration has occurred at the campus level, the data center side remains separate. He concludes that networks should deliver applications and experiences as a single, unified entity instead of being sold as separate silos, an approach that contributes to unnecessary complexity.

His key analysis points include:

• Cisco should offer a unified hardware line for customers, which could be managed either through Meraki or CLI, mitigating the need for a hardware overhaul when switching between the two.
• By integrating data center, campus, and Wi-Fi certifications, Cisco could enhance the overall user experience.
• The current siloed approach to network products adds unnecessary complexity, which could be addressed by treating the network as a single, unified entity focused on delivering applications and experiences.

Watch Zeus break down the Cisco’s networking challenges and thoughts on how it can simplify.

Security is perhaps Cisco’s best upside opportunity

Let’s shift gears and look into the all-important and exceedingly crowded security sector.

Above we show the ETR spending data in the security market – same dimensions – Net Score on Y and Pervasion on the X. Microsoft Corp. is in the upper right and skews the data, but you can see Cisco has a major presence. As do Palo Alto Networks and Splunk. All credible on the vertical axis.

The leaders in presence are below the 40% line, but that’s expected for such large companies. The squiggly line represents Cisco’s path over the past 10 quarters. There is no debate that the company is very strong in security, but we believe it needs to do a better job consolidating the piece parts and simplifying customer outcomes.

Note that Cisco doesn’t have the spending velocity of the pure plays such as CrowdStrike Holdings Inc., Okta Inc., Zscaler Inc., CyberArk Software Ltd. and SailPoint Technologies Inc. — or even Cloudflare – but its Net Score is respectable. Cisco also just purchased Armorblox Inc., which uses artificial intelligence to reduce email and other risks.

In many ways we think Cisco could be a leader in the security supercloud, bridging on-premises, multiple clouds and edge security experiences.

The following summarizes Keravala’s thoughts:

Kerravala claims Cisco has succeeded in cybersecurity despite itself but has a great opportunity if it can address some of the stovepipe challenges.

The emerging observability opportunity

Let’s now dig into observability, which is sort of the confluence of log analytics, application performance management, monitoring and related fields. Cisco has a major stake in this business through its acquisitions of AppDynamics and ThousandEyes.

Before we look at the spending data, here’s what one customer said in an ETR roundtable about this topic:

This is a head of engineering… a customer who says I’m sticking with AppD. This person references the value of the ThousandEyes acquisition along with AppD and security. The application-centricity is an attractive dynamic to this Cisco shop. SecureX is Cisco’s integrated security play, which admittedly needs more and better integration. But basically in the second quote this person calls out the attractiveness and value of a single platform. If you’re a Cisco shop. And if not it’s a “free game” – perhaps implying a free-for-all of complexity.

AppD has been maybe the biggest wasted opportunity for Cisco since they’ve acquired it. I really expected AppDynamics to become the tip-of-the-arrow sale for Cisco… and I would like to see AppD become a lead sales tool across Cisco’s portfolio. – Zeus Kerravala

Watch Kerravala’s commentary on Cisco’s observability play with ThousandEyes & AppD.

Comparing key observability players’ spending profiles

Let’s get into the ETR data. ETR doesn’t have a full-stack observability category, but through this next view below we’re able to bring in various companies that are hovering around the space to see their relative positions.

It’s a similar chart above where we show Net Score against pervasiveness in the data. And we’ve plotted Splunk, Datadog Inc., Elastic N.V., Grafana Labs, Dynatrace Inc. and New Relic Inc.. You can see AppDynamics, which Cisco bought in 2017 for almost $4 billion. And it introduced Intersight shortly thereafter as a visualization and orchestration tool. But there were still holes in the portfolio as the market moved to full-stack observability, so Cisco bought ThousandEyes during the COVID pandemic for about $1 billion. Then it sort of strung them together with an overlay, but the story is not over.

Cisco has an opportunity to really take these pieces and integrate them across the portfolio in a potentially game-changing way. At least in the manner that one customer described earlier – especially for Cisco shops.

Kerravala’s primary argument is that Cisco needs to deliver on the vision of full-stack observability and streamline its multitude of single-pane-of-glass solutions into a unified, intuitive dashboard. The diverse range of visibility tools it currently offers could be more effectively utilized if they were integrated into one comprehensive system, with AppD serving as the principal lens. Operational specifics could then be accessed through drill-down features, allowing for a more organized and efficient user experience.

Kerravala’s key takeaways on observability:

• Cisco must make good on its promise of full-stack observability.
• The current multitude of Cisco’s single-pane-of-glass solutions should be streamlined into a unified dashboard.
• AppD should be the main view, with the ability to drill down into the other specific tools.
• He recognizes that Cisco already has all the necessary components; the challenge lies in integrating them into a cohesive system.

Kerravala comments on Cisco’s many panes of glass.

What to watch at Cisco Live 2023

Kerravala just published a “Know before you go” post on SiliconANGLE, outlining his thoughts on what to expect at Cisco Live. Let’s review that and what we’ll be looking for next week.

Whither AI for Cisco?

A key question is how Cisco will handle AI. These days, brands run the risk AI washing, but if you bury the AI lede, you look less relevant. In our view, Cisco at the very least has to use AI to make Cisco infrastructure run better and more secure through automation and better management.

Here’s a summary of key points from our conversation with Zeus on what to expect from Cisco Live in terms of AI:

• We don’t expect Cisco to brand itself as an AI company like Nvidia Corp. or even IBM Corp.’s attempts to do so. Instead, AI will remain an integral part of their overall toolkit used to build their products.
• AI has been part of Cisco’s portfolio for a while. It underpins products such as intent-based networking and Encrypted Traffic Analytics, which uses AI to detect malware in encrypted traffic.
• The company’s collaboration portfolio is also AI-rich, but it is considered more of an operational tool rather than a product that’s sold separately.
• AI might be highlighted more during keynotes due to current hype, but it’s not the company’s primary focus.
• The use of AI, such as a ChatGPT-like interface, could be beneficial for Cisco’s operations, like using Webex to find information or for network operations to identify areas in need of upgrades. This would essentially make their portfolio more user-friendly.
• Natural language processing can simplify interfaces, relieving the load from high-level engineers and delegating tasks to tier one or two support.

The security opportunity calls for Cisco

We’ll be watching the security space closely. We believe it’s a mandate that Cisco integrate its vast portfolio across on-prem, all the major clouds and out to the edge. Palo Alto Networks has the leg up on consolidation in our opinion, but Cisco has such a major presence that it can do very well in this area, coming at the problem its strength in networking.

Here’s a summary of what we think Cisco needs to do in security and what we’ll hear at Cisco Live:

• Security is important because it offers the most substantial growth potential for Cisco, as it is a single-digit player in a market projected to be worth $75 billion-plus.
• Even a slight increase in market share, such as reaching 10%, would greatly boost Cisco’s revenue.
• The long-term vision is to have Cisco’s security share match its network share, and to have Cisco network and Cisco security working together for improved risk identification and resolution.
• We hope to see more integration of Cisco’s cloud security products to create a more unified and user-friendly experience.
• The security industry often makes the user the integration point, which can lead to confusion and inefficiency. This needs to be addressed by the industry at large and Cisco has an opportunity to attack this problem.
• Cisco is in a unique position to make security more user-friendly and seamless because it owns the network and can embed a lot of security features into it.
• We anticipate hearing more about Cisco’s progress on its vision for security and expect to see more of the product roadmap at the upcoming event.

Can Cisco be the supercloud network?

Core networking is always a the forefront of Cisco Live. I keep coming back to the supercloud concept – a singular experience across clouds in a cloud-native fashion. Can Cisco bridge the legacy world of apps and infrastructure with cloud-native?

• Cisco is not going to become a cloud provider like Amazon Web Services Inc., but it has the potential to be an abstraction layer that enables the concept of a “supercloud.”
• A network supercloud would allow customers to use multiple cloud providers, edge locations, and private data centers seamlessly as one logical cloud.
• Traditional cloud providers will not enable this, as their tools are specific to their platforms. Cisco, however, can provide network transport, security and optimization that transcend individual cloud platforms.
• Cisco can become the bridge between physical clouds and create a logical supercloud thanks to its work with cloud providers, telcos and tools such as ThousandEyes and AppDynamics.
• This process begins with networking, hoping to see more progress with the Meraki/Catalyst integration at the upcoming show. We are also looking for advancements in consolidating different versions of Wi-Fi and other disparate parts of Cisco’s networking story.

Collaboration: Hybrid work is still a big thing

What about collaboration? That business went from rocket ship to rapid deceleration post-pandemic, but hybrid work isn’t going away and it brings real challenges. Is this a game of integrating with your security portfolio to reduce risk? Or creating better and more simplified user experiences? We know that Jeetu Patel wants to make Webex 10 times better than any other platform.

• We believe Cisco’s primary challenge in the collaboration market is Microsoft Teams. Despite having a poorer user experience compared with competitors, Teams is widely adopted thanks to its inclusion in Microsoft licensing plans.
• Teams, however, can prove costly when additional features such as voice and security are added.
• Cisco has accepted the coexistence with Teams, allowing its devices to run Teams natively. This could be beneficial as companies are likely to use more than one collaboration vendor.
• We believe Cisco’s WebEx, loaded with extensive features, can offer a better experience for specific departments and expand its presence within organizations gradually.
• A suggested strategy for Cisco is to manage other collaboration platforms through the WebEx console, offering better management for those platforms and then gradually introducing their own solutions.
• In the context of observability, the application-centric view is crucial. Prioritizing network upgrades and security deployments based on their impact on application performance can provide quantifiable business metrics.
• Cisco’s AppDynamics offers a unique perspective into application performance that other infrastructure vendors may lack. This tool could be instrumental in making such decisions.

Application centricity is the opportunity in full-stack observability

Cisco we think has an opportunity to make some moves in full-stack observability, but the linchpin as Kerravala wrote on SiliconANGLE is the application-centric view of the world. The two main takeaways from our conversation on observability include:

• The application-centric view is crucial. Prioritizing network upgrades and security deployments based on their impact on application performance can provide quantifiable business metrics.
• Cisco’s AppDynamics offers a unique perspective into application performance that other infrastructure vendors may lack. This tool could be instrumental in making such decisions.

Every large tech company has to address ESG

And finally we asked Kerravala if he has ever been to a Cisco Live where Chuck Robbins hasn’t done his part to address environmental, social and governance issues? Here’s a summary of what we discussed:

• Cisco has a corporate goal to positively impact a billion lives by 2025. It’s making significant progress toward this goal through a variety of programs. It’s part of the Global Citizen group, and it conducts contests and provide financial support to entrepreneurs aiming to make the world a better place.
• Cisco’s products also help with sustainability. They are embedded with features such as EnergyWise, which shuts off the network when it is not in use and turns it back on when it is needed.
• Cisco’s custom application-specific integrated circuits are optimized for specific network functions, leading to lower power consumption.
• The company offers Power over Ethernet features to further support sustainability.
• At events such as Cisco Live, it has highlighted these sustainability features, and we expect to see more of this in the future.

We didn’t talk much about edge, but it’s a significant part of the future and we anticipate hearing more about it in the future.

Here’s the full conversation about what to expect at Cisco Live

Finally, theCUBE will be at Cisco Live in Las Vegas at the Mandalay Bay. We’re on the expo floor across from the Net Vet Lounge, which is Booth 1427. We have a small space so we’re doing the pop-up CUBE and we’d love to see you. By all means please stop by and say hello.

Keep in touch

Many thanks to Zeus Kerravala for stopping by the studio to share his knowledge. Thanks to Alex Myerson and Ken Shifman on production, podcasts and media workflows for Breaking Analysis. Special thanks to Kristen Martin and Cheryl Knight, who help us keep our community informed and get the word out, and to Rob Hof, our editor in chief at SiliconANGLE.

Remember we publish each week on Wikibon and SiliconANGLE. These episodes are all available as podcasts wherever you listen.

Email david.vellante@siliconangle.com, DM @dvellante on Twitter and comment on our LinkedIn posts.

Also, check out this ETR Tutorial we created, which explains the spending methodology in more detail. Note: ETR is a separate company from Wikibon and SiliconANGLE. If you would like to cite or republish any of the company’s data, or inquire about its services, please contact ETR at legal@etr.ai.

Here’s the full video analysis:

All statements made regarding companies or securities are strictly beliefs, points of view and opinions held by SiliconANGLE Media, Enterprise Technology Research, other guests on theCUBE and guest writers. Such statements are not recommendations by these individuals to buy, sell or hold any security. The content presented does not constitute investment advice and should not be used as the basis for any investment decision. You and only you are responsible for your investment decisions.

Disclosure: Many of the companies cited in Breaking Analysis are sponsors of theCUBE and/or clients of Wikibon. None of these firms or other companies have any editorial control over or advanced viewing of what’s published in Breaking Analysis.

Image: mehaniq41/Adobe Stock

In the past few days, technology stocks have been on a tear, inspired by the awesome performance of Nvidia (NVDA).

Nvidia, which makes chips beautifully suited for artificial-intelligence applications, saw its stock soar 27% in the week ended May 26, and 172% year-to-date. Kudos to those who own it, but I probably never will. It’s a very expensive stock, and I’m a cheapskate.

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What do I mean by expensive? Nvidia shares go for 202 times the past four quarters’ earnings. For comparison, the average stock in the Standard & Poor’ 500 currently sells for 21 times earnings.

For value investors like me, who belong to the bargain-hunting school of stock selection, getting enough exposure to technology stocks is always a challenge. Tech stocks are in the forefront of innovation, and therefore they often sell for high multiples.

Here are a few tech stocks that I think price-conscious investors might consider. Each currently sells for less than 20 times earnings.

Cisco Systems CSCO

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The company that led the field in computer networking before most people knew what that was, Cisco Systems now sells for 18 times earnings.

Had you invested $1,000 in Cisco on March 1, 1995 you would have had $34,982 five years later. Those glory days are past, but Cisco remains a formidable company. Its return on stockholders’ equity (a common measure of profitability) was 28% in the past four quarters. I consider anything north of 10% respectable, and anything above 15% good.

Financially strong, Cisco makes $35 in profits for every dollar it pays out in interest on its debt. Debt is 20% of equity; I consider anything below 50% a good ratio. Cisco’s profit margin after taxes is about 21% — again, a handsome number.

Texas Instruments TXN

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Possibly you know Texas Instruments because of its hand-held calculators. But its main product is semiconductor chips. It is one of the most profitable companies in the chip industry, with a return on equity of 57%.

According to Wikipedia, Texas Instruments held 45,000 patents worldwide, as of 2016. In 1954, it made the first commercial silicon transistor, and the first transistor radio.

The company has exceeded a 15% return on equity in each of the past 15 years, and has been over 50% the past five years. The stock sells for just under 20 times earnings.

Applied Materials AMAT

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Weighing in at 18 times earnings is Applied Materials, one of the world’s largest makers of semiconductor manufacturing equipment. It, too, has a king-sized return on equity, 51% in the past four quarters.

Applied Materials has been profitable in 14 of the past 15 years, the exception being recession-scarred fiscal 2009. A potential problem, given the tough state of relations between the U.S. and China, is that Applied Materials gets about 28% of its revenue from China and another 24% from Taiwan.

Lam Research LRCX

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Speaking of China, Lam Research has warned that this quarter’s revenue will come in below previous expectations, partly because the U.S. has restricted sales of certain advanced technologies to China. Revenue for the quarter may be about $3.1 billion, revised down from about 3.5 billion.

According to Reuters, Lam has been getting about 30% of its revenue from China. That includes Taiwan, where Taiwan Semiconductor is a big customer.

Lam is a leader in wafer fabrication equipment, particularly “etch,” the process of laying out the pathways on a semiconductor chip. Over the past decade, it has increased its revenue almost 20% a year. The stock sells for 18 times earnings.

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I like Leidos Holdings, based in Reston, Virginia, because it provides software and services to the U.S. Department of Defense and the U.S. intelligence community. Given U.S. frictions with China, Russia, Iran and North Korea, I think Congress will have to maintain or increase defense spending.

If that defense spending is to be effective, in my opinion, it will have to include a hefty dose of software upgrades. The company’s earnings history is inconsistent, but has shown a profit in 14 of the past 15 years, and has earned a 15% return on equity or better in 10 of those years. The stock sells for 16 times earnings. One worry: The balance sheet is a little heavy on debt for my taste.

Disclosure: I own Texas Instruments and Lam Research personally and for most of my clients. I own Applied Materials for some clients. Katharine Davidge, my wife and a portfolio manager at my firm, owns Nvidia personally and for some clients.

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To sustain growth — and hence reward equity owners — public company CEOs must exceed investor expectations each quarter.

In the last three years, rapidly changing headwinds and tailwinds have made that particularly challenging. Some companies — such as Zoom Video, Peloton, and Wayfair W — enjoyed massive growth in demand as people worked from home.

What’s more, technology companies that enabled people to work from home also enjoyed a surge in demand because the war for scarce talent caused employers to let remote workers use whatever applications they wanted.

As the pandemic waned and the Federal Reserve began raising interest rates in March 2022, these consumer-focused pandemic darlings suffered a plunge in demand growth.

Meanwhile, enterprise technology companies — such as Waltham, Mass.-based Dynatrace — have experienced a more subtle fate. As macroeconomic headwinds strengthen, companies buy more technology that helps them cut costs and hold onto revenue.

Dynatrace, a provider of tools that find and fix glitches in the vital cloud software companies use to interact with their customers, provides such CFO CFO -friendly benefits.

In a May 18 interview following a strong first quarter financial report, CEO Rick McConnell made a clear case for the value of Dynatrace products to its enterprise customers and why the company will continue to grow in the face of today’s macroeconomic headwinds.

Meanwhile, purveyors of technology that does not offer companies such financial benefits must present compelling proof of value. If they cannot provide such proof, customers are likely to spend less on their products.

(I have no financial interest in the securities mentioned in this post).

Dynatrace’s Strong Fourth Quarter Fiscal 2023 Report

Dynatrace’s latest earnings report for the fourth quarter of fiscal year 2023 ending March 2023 exceeded most investor expectations as did its first quarter results and its forecast for the fiscal year 2024.

Here are the highlights, according to Investor’s Business Daily:

• Revenue up 27% to $314 million — the second quarter in a row of slightly faster sales gains — and $6.5 million above the analyst consensus.
• Adjusted earnings up 82% to 31 cents a share — nine cents per share more than the consensus.
• Annual recurring revenue increased 29% to $1.247 billion — $37 million more than estimates.
• Fiscal year 2024 revenue forecast increase of 21% to $1.397 billion $35 million above analysts’ estimates.
• Fiscal year 2024 earnings per share of $1 — three cents above consensus.
• Fiscal year 2024 ARR range midpoint of $1.48 billion — $26 million more than estimates.

The one disappointment was the addition of 179 new corporate customers — which was 17% fewer than the previous quarter, according to an RBC Capital report.

Early contract renewals and significant tax payments also concerned RBC Capital. More specifically, $13 million in increased ARR came from early renewals and free cash flow in 2024 is expected to be $60 million lower due to tax payments, noted IBD.

Investors reacted positively to the report. Since May 16, the day before the earnings announcement, Dynatrace stock has increased 5% to $49 per share.

Dynatrace’s Winding Road To $14.2 Billion Market Capitalization

Dynatrace has taken a long path to today’s $14.2 billion stock market capitalization. It was founded in Austria in 2006, backed by Bain Capital, acquired by Compuware, taken over by private equity firm Thoma Bravo, spun out of Compuware, and brought public in 2019.

In February 2017, then-CEO John Van Siclen, a Princeton history major who previously ran Interwoven, an enterprise content management firm, told me Dynatrace was founded by Bernd Greifeneder in Linz, Austria and moved to Waltham in 2008 after Bain Capital backed it. In 2011, Compuware bought Dynatrace. Three years later, Thoma Bravo acquired Compuware.

Thoma Bravo later spun out Dynatrace as a private portfolio company and worked its magic on the company. As Van Siclen told me, Thoma Bravo boosted cash flow by cutting costs in functions outside of product development, sales, and customer support. It hired enough salespeople to meet bookings goals, created clear metrics, and optimized finance, IT, and human resources.

In August 2019, Dynatrace went public and as of May 20, Thoma Bravo still owned 29% of Dynatrace stock.

However, in December 2021, McConnell took over as CEO after Van Siclen retired. As McConnell explained, “I was CEO of a startup that Cisco acquired in the early 2000s and ran Cisco’s unified communications business. After that I spent eight years at Akamai and ran products before becoming president. In 2021 Dynatrace needed a CEO. I was making a transition and most of the offers were easy to say ‘no’ to.”

The Stanford MBA tried but could not find a reason not to take the Dynatrace CEO job. “I was trying to find out what was wrong with Dynatrace and could not see a hole in its story. It was performing according to the rule of 50 — ARR growth plus cash flow margin was above 50%, it had a great product set, its customer relationships were bulletproof. In November 2021, I took it and haven’t looked back,” he told me.

Sadly for investors, since peaking in October 2021 at $22.8 billion, Dynatrace’s stock market capitalization has declined 38% during which time the NASDAQ NDAQ fell 20%.

How Dynatrace Keeps Creating Value For Customers

Dynatrace creates value for enterprises by identifying and fixing problems with their cloud-based software more quickly and effectively than competing products. It invents new products that solve new problems its customers face while rivals try to protect their old products. Finally, it holds people accountable for achieving ambitious goals.

Why Dynatrace customers keep buying despite macroeconomic headwinds

Companies have transitioned to running their operational software in the cloud, which has increased the challenges of maintaining an excellent customer experience. As McConnell told me, “The problem we are solving is the massive explosion of data created by the proliferation of the cloud. AWS, Azure, and Google Cloud are driving a huge business with $175 billion in ARR. This creates an explosion of data and the complexity of software developed to run on the cloud must be bulletproof.”

People expect their interactions with a company to work perfectly, “Users expect the cloud to work all the time. It used to be that when software ran on mainframes it would be updated every six months. On the cloud software is updated far more frequently and it is hard to make the software work as well. Users expect it to work every time. The explosion of data and applications makes it harder to manage,” he said.

Dynatrace creates measurable value for its customers by improving the user experience to prevent lost revenue. “British Telecom started using Dynatrace a year ago. They issued a public report on our behalf. We helped them reduce the number of incidents by 50%. This will enable them to save about $35 million over several years,” he said.

Nevertheless, Dynatrace is not immune to the prevailing macroeconomic headwinds. “We are not impervious to macroeconomic challenges. Enterprise budgets are tighter and the sales cycle is lengthening. We show clients how we create value for them — by helping your environment work better by saving money and improving the user experience. The last iPhone launch was flawless due to Dynatrace,” he said.

How Dynatrace wins and keeps customers buying

Dynatrace prevails against rivals because it identifies and solves problems with cloud software more effectively.

Specifically, Dynatrace saves customers time spent troubleshooting. Its competitors provide dashboards with relatively vague red, yellow, and green diagnosis of cloud application performance.

Dynatrace offers a decade old AI engine that provides automated responses to resolve problems more quickly. “We can pinpoint the problem to a server in Virginia or a specific slice of code,” McConnell noted.

Dynatrace keeps customers buying by adding new services. Its net retention — a measure of how much more its customers spent in the most recent year — is 119%. Dynatrace’s gross retention is about 95%. He told me that Dynatrace customers need to identify security vulnerabilities in software — so Dynatrace has added an application security service.

How Dynatrace stays ahead of the competition

Dynatrace stays ahead of rivals by viewing itself from the customer’s perspective, setting clear objectives, holding people accountable, and reinventing itself as rivals defend their core products.

Dynatrace listens to the voice of the customer. “Our product strategy, pricing, and organization structure is aimed at delivering customer value. I meet with customers every month and we are helping them with the three or four most important applications that they use to run their business. It is super humbling,” said McConnell.

Dynatrace operates a flat organization and empowers people to meet its objectives. The company values people who are ethical, tenacious, humble and who always aim to be better. This approach enables Dynatrace to grow ARR at 29% and enjoy significant cash flow — resulting in 29% free cash flow margins.

Dynatrace has maintained its lead in the industry while rivals have fallen behind. As he told me, “Gartner Magic Quadrant and Forrester Wave report we are a leader in the industry. The companies that were leaders five years ago moved down and to the left.”

While rivals suffer from what I call cognitive lock-in, Dynatrace says it has “innovation DNA. We constantly look to reinvent and evolve as the market evolves. Our core market of observability is merging with log management — from companies like Splunk. We see the markets converging,” he explained.

By contrast, Dynatrace’s competitors protect their core business. “They are ahead for the first three quarters and they start playing defense because they’re leading. Why are you slowing down? They seem to have lost a vision of what they are trying to achieve and are not innovating in that direction,” he said.

A key Dynatrace advantage is its European R&D organization. “Our secret weapon is our 1,000 person R&D unit in Austria and central Europe. They are talented, loyal engineers focused on success. Our founder and chief technology officer is a passionate innovator,” McConnell concluded.

What’s Next For Dynatrace Stock?

Given the value that Dynatrace provides for customers, its stock seems underappreciated. According to CNN Business, 24 analysts set the company’s median 12-month price target at $53.50 — about 8.8% above its current price.

If Dynatrace can keep providing customers with a significant return in investment — as measured by cost reduction and revenue enhancement — its stock price could go up much more.

Cisco has renewed its partnership as the USGA’s official technology partner. The two sides will collaborate in forming an Innovation Committee to further explore tech-driven advances in golf and introduce the USGA ShotCast Powered by Cisco in 2023, enabling users of the USGA app and website to receive real-time shot tracking data and 3D hole imagery for the U.S. Open and U.S. Women’s Open. Every shot shown in the TV broadcast will be archived for fans to view, which is a first for the U.S. Women’s Open.

Through this relationship, Cisco debuted the first “Connected Course” -- Wi-Fi covering all 18 holes of the 2019 U.S. Open at Pebble Beach -- while enhancing the fan experience with Webex video sharing during the height of the pandemic and introducing 4D volumetric swing capture in broadcasts. Cisco will increase its support of the U.S. Adaptive Open while continuing to back other initiatives to make golf more diverse and inclusive.

Reuters SG

India will start a pilot project this week to establish itself as an electronics repair hub by relaxing cumbersome import-export rules, a move that could draw tech majors such as Flex to expand such operations in the country. Prime Minister Narendra Modi has promoted electronics manufacturing in India and attracted the likes of Apple and Xiaomi, but the country still lacks an industry for repair outsourcing which is estimated to be worth $100 billion globally and currently dominated by China and Malaysia. Following a push by an industry group for IT and electronics manufacturers, MAIT, the Indian government will test changes to lower the time required for necessary approvals for imports and exports to a day from as much as 10 days.

Mon, 02 May 2022 02:15:00 -0500 en-SG text/html https://sg.finance.yahoo.com/quote/CSCO/