Notes - CSCO's New Hypershield

Summary

• Cisco has been facing challenges as a legacy tech giant and has struggled with innovation and acquisitions in recent years.
• The company is making efforts to revive its growth and reputation, including creating an internal venture called Outshift to attract top talent and introducing Hypershield, a new cybersecurity solution.
• Hypershield is a distributed, self-evolving auto-segmentation and protection software designed to secure enterprise applications, leveraging eBPF technology and AI. It aims to solve the challenges of microservices and provide automated patching and policy control.
• Hypershield is a novel concept that will need CSCO to educate the market before acceptance and adoption prevails. But if CSCO can do this, Hypershield has the potential to be a game changer.

Is Cisco (CSCO) a fading giant that survives solely due to its deep entanglement within enterprises' networking and security stacks? Or is CSCO on the brink of a genuine innovation revival, poised to reignite growth?

Most of the time, the future is indifferent to the past, so we can simply extrapolate what we know in the present out into the future. Sometimes, you can apply logic and develop a potential contrarian thesis that indicates the future indeed looks different from the past.

If we simply extrapolate CSCO's past, then it is definitively an avoid from the fundamental perspective.

CSCO has created a questionable reputation when it comes to M&A. The giant has made well over 250 acquisitions, many of which the company spent billions of dollars, yet seldom have they sufficiently altered the path away from the destination of becoming a legacy dinosaur.

It has been acquiring tons of promising startups who were the early leaders in emerging fields. Typically, these startup founders left about two years after the acquisition, when the mandatory retention period came to an end. Subsequently, the acquired business ceased to evolve and started to trailing behind its peers who remained more agile, standalone startups. Then, CSCO becomes compelled to fold the business into another division and the acquired brand ceases to exist, typically with the associated goodwill on the balance sheet being totally written down.

In contrast, Palo Alto Networks (PANW) has been able to acquire highly regarded startups and keep the founders for many years past their mandatory retention period. PANW's CEO Nikesh Arora has achieved this by putting the founders in divisional leadership positions only 2-3 layers away from the C-Suite, rather than the typical M&A approach of appointing them to some role several layers away, to give them a greater sense of influence on the company's overall objectives. Furthermore, the acquired founders are given substantial discretion in how to continue developing the acquired technology, empowering them to continue with their original vision.

That said, for the most ubiquitous legacy tech giants, it seems like they are never going to fade away. From time to time, usually after one or two decades of underperformance, the board or the management recognizes the need for change. After all, no matter how oblivious one can be, they know something is wrong when every street analyst speaks of their company as a legacy company and assigns low multiples to the company, instead favoring shiny next-gen competitors. In recent years, we are seeing a tide of legacy tech giants having their moment of rebirth, or rejuvenation, to a certain extent.

The classic example here is MSFT, whose long-term non-tech, CEO Steve Ballmer, willingly chose early retirement after himself, Bill Gates, the board, and numerous head hunters deliberated on the next CEO candidate that would be critical for MSFT's future success. And the rest is history. After that, we saw Oracle (ORCL) making dramatic changes that were also unimaginable before, including the embracement of open-source and a more open approach towards its products, including MySQL, and traditional ORCL products that can run on third-party clouds like Azure. Instead of making another like-for-like cloud competing with the early movers AWS and Azure, Oracle Cloud Infrastructure (OCI) has focused on places where it has the differentiation and an edge, especially in terms of moving legacy ORCL databases to the cloud. Recently, we are seeing promising signs of improvements from IBM too, which we will reserve for another note.

CSCO was closely tied to Sequoia founder Don Valentine from the start. Initially, it was a side project of several Stanford University staff members. Recognizing its commercial potential, Don Valentine invested and incubated CSCO, driving it toward remarkable success. At that time, venture capitalists functioned more like private equity firms. Valentine selected CEOs and executives for CSCO, shaped its business strategy, and ultimately replaced the original founding couple with John Chambers as CEO. Under Chambers' leadership, CSCO's revenue soared from $1bn to over $45bn. (By the way, Chambers has since co-founded Nile Networks, a next-gen NaaS startup.)