Is Cisco Sending Subtle Warning to Managed Service Providers?

First, let me clarify the headline: I'm not pressing a panic button. Cisco's overall profits and revenues, announced May 6, were impressive. But if you're a managed service provider, there's a note of caution: Cisco's sales to big U.S. service providers were weak this quarter. Here's why managed service providers should care.

In many ways, small and mid-size managed service providers (MSPs) are distant cousins to big U.S. service providers. The big service providers, just like MSPs, depend on service level agreements (SLAs) and recurring revenue to thrive.

Now, my key point: If the big service providers are cutting their IT purchases, that could signal a subtle warning sign to smaller MSPs pushing into voice over IP, unified communications and other IP services that first landed in large enterprises.

Cisco's overall business was relatively strong in the company's most recent quarter. One big exception involved Cisco's sales to big U.S. service providers , according to an interview CEO John Chambers gave to Barron's. (By the way, Barron's daily blog is a fantastic read.) In the piece about Cisco's earnings, Barron's reports:

The one challenging area was in the U.S., where order growth was in the mid-single-digits. [Chambers] notes that large enterprise orders were actually up about 6%, quite a contrast from two quarters ago, when the large U.S. enterprise customers were slowing. Chambers said the financial and manufacturing segments are now “growing better for us” than they did in the last two quarters.

THE SERVICE PROVIDER SEGMENT, HOWEVER, "WAS TOUGH," HE SAYS, WITH SLIGHTLY NEGATIVE GROWTH, AFTER 12 STRAIGHT QUARTERS OF 20%-PLUS GROWTH. Chambers says the number would have been positive without a tough comparison for the Scientific Atlanta business, but nonetheless would have been below recent performance.
Forgive me for capitalizing the service provider sentence above, but I didn't want you to miss it.

Meanwhile, Forbes says "Cisco Looks Solid." But Forbes also mentions the service provider hiccup:
Erik Suppiger of Signal Hill Group was surprised that [Cisco's] orders from service providers in the U.S. were down 3.0% from last year, a curious sign after a lengthy period of robust growth.

Jonathan Chadwick, Cisco's corporate controller, said some Internet providers have cut their short-term spending on infrastructure, but added that Cisco expects the business to pick up again soon because service providers need to keep upgrading their networks.
Cisco isn't sounding an alarm. Neither am I. But I continue to caution the MSP industry to avoid irrational exuberance. Focus on building long-term value. Strengthen your services -- and your brands. And don't get caught up in the short-term MSP industry hype.
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