Cisco revenue analysis by TBR

Cisco services revenue grows for 54th consecutive quarter as the company focuses on Security, IoT and collaboration efforts to expand portfolio, says Kelly Lesiczka, research analyst at TBR.

The report noted that a transition to software and subscription based provider will benefit revenue as it will provide management and end-to-end transformation services opportunities.

Cisco’s corporate revenue declined 2.6 percent year-to-year to $12.4 billion in 3Q16, while Cisco Services revenue grew for the 54th consecutive quarter, increasing 7.5 percent year-to-year, to $3.1 billion. Cisco Services contributes 24.7 percent of total Cisco revenues, improving 230 basis points from 22.4 percent in 3Q15, driven by renewals and attached services around digital transformation initiatives as well as increased collaboration efforts with IBM and Salesforce. Expanding innovation efforts and partner network will enable Cisco to develop automation capabilities with industry focused security services. Services deferred revenue also grew 7.6  percent year-to-year to $10.4 billion in 3Q16, supported by the product and subscription business.

Cisco services gross margin was 65.1 percent in 3Q16, improving 20 basis points from the year-ago quarter. Total Cisco Systems headcount was relatively static, a 0.4 percent change from 71,063 in 3Q15 to 72,385 in 3Q16 with acquisitions canceled out by ongoing workforce restructuring as it transitions to a software and subscription based model. TBR expects Cisco to continue developing its cloud, digital, analytics and IoT capabilities as it focuses on innovation and increasing acquisition activity (e.g. CloudLock, Inc., ContainerX Inc., Heroik Labs, Inc.) to expand its cloud and software portfolio resulting in implementation and management services opportunities.
cisco-q1-fy-2017-geographyExpanding Cisco’s cloud professional services capabilities will improve Cisco’s position to support clients’ cloud adoption

With increasing cloud adoption by businesses, in September Cisco expanded its Advanced Services segment with three new Cloud Professional Services – Multi-cloud management and orchestration for Cisco Cloud Center; Cloud Acceleration services and IT transformation services for DevOps. The Cloud Professional Services help business customers reduce complexity and optimize their multi-cloud environments.

Cisco is on target with the launch of its Cloud Professional Services. According to TBR’s Cloud Professional Services Market Forecast 2015-2020 Update, the cloud professional services market is slated to surpass the $60 billion mark in 2020 as continued “add to cart” cloud “as a Service” workload adoption drives integration and ongoing managed services opportunities. Systems integration will provide the largest vendor opportunity through 2020, as customers increasingly require integration of their hybrid IT and multi-cloud assets to allow for the sharing of data across applications, platforms and infrastructure.

While introducing cloud-related consulting, systems integration, application development and maintenance and managed services is a necessity for Cisco to compete for cloud adoption opportunities, TBR does not expect the company to significantly expand revenue share of such services. Instead, Cisco will drive a majority of services revenue from technical support, which accounted for an estimated over 75 percent of services revenue in 3Q16.

Cisco and Ericsson expand the scope of their partnership to address enterprise and public sector clients’ infrastructure transformation

Cisco continues to use partnerships to cost-effectively augments its services capabilities and deliver transformative solutions to drive business outcomes for its extended client base. One year after the signing of its partnership, in November Cisco and Ericsson announced the next phase of their activities to offer joint solutions to enterprise and public sector clients, expanding the initial work with service provider clients, and address demand for solutions in transportation, Smart City, utilities and the web segment.

On the services side, the partnership remains the same, with Cisco delivering the bulk of infrastructure and IP competence and Ericsson offering its scale and skills in systems integration and managed services. With approximately 60 joint deals won during the past year, TBR expects Cisco Services to benefit at the revenue and profitability side. Cisco Services will expand its work and revenues in areas such as networks, enterprises, datacenter, cloud and security and in countries, such as Brazil, which is a newly added region for joint activities. Utilizing Ericsson’s sales and services professionals instead of adding more employees is a quick and cost-effective way for Cisco to capture network modernization opportunities and expand its global reach.

Cisco is increasing its mix of subscription revenue, but hardware remains the sales volume driver, says Michael Soper, analyst at TBR.

Cisco’s revenue grew 1 percent year-to-year, excluding its set-top-box (STB) business, which the company divested in 4Q15. The STB divestment is paying dividends on profitability as its absence drove a 200 basis point increase in gross margin year-to-year. With the exception of steady growth in the NGN Routing, Security and Service segments, Cisco’s segments have swung between growth and decline in 2016 as the company shifts its business model to develop more recurring revenue streams.

TBR believes Cisco is prudently shifting its portfolio – leveraging acquisitions and organic investment – to include more software delivered via a subscription model prior to a significant deterioration in demand for its routing and switching hardware. Cisco will be able to partially compensate for declines in its hardware revenue over the long-term due to its growing focus on security, collaboration and video software and subscription services.

Cisco partnered with Salesforce to enhance cloud-based productivity and customer support

In September Cisco announced a three-pronged technology partnership with Salesforce whereby Cisco will make elements of its Collaboration, IoT and customer support portfolio available on Salesforce’s IoT, Sales and Services Clouds. The outcome will enable Cisco to supply its unified communications, IoT and customer support suite across a significantly broader cloud customer base.

TBR believes the alliance is a substantial boost to Cisco’s strategy to build its stable of recurring Collaboration and IoT software revenue. Virtualized versions of WebEx and Spark will be integrated into Salesforce’s Service and Sales Clouds, creating a one-stop-shop for Salesforce customers to communicate in real-time via video or chat in the Salesforce cloud. For IoT, the companies will combine Cisco’s Jasper platform with Salesforce’ IoT cloud, providing a more robust IoT solution extending Jasper’s end-to-end device lifecycle management to Salesforce’s IoT Cloud users.

Finally, the alliance will address customer service by combining two best-in-class customer support programs whereby Cisco’s Unified Contact Center Enterprise infrastructure is combined with Salesforce’s Service Cloud, a customer support application. The end-result will be a more robust call center and support service.

The Cisco-Ericsson partnership grows to address the enterprise opportunity

In November Cisco and Ericsson announced the next phase of their strategic partnership, which includes plans to offer combined solutions to select enterprise and public sector customers, following the first round of engagements which targeted service providers. Initially the two entities will aim to sell combined solutions to the transportation, Smart City and utilities verticals as well as public sector customers.

In these engagements the basis of the partnership will remain the same, with Cisco providing the bulk of infrastructure and Ericsson addressing the front-end services opportunity, primarily C&SI. As the partnership evolves to include new verticals, additional elements of Cisco’s portfolio will be sold jointly, such as its Security, Wi-Fi and data center switching products.

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