Cisco Systems (NASDAQ:CSCO) current rise is no "Sucker Rally" as the company continues to pull a string of crystal ball acquisitions. The company is slowly transitioning into a software company and is indeed doing this without breaking a sweat, or put it this way, in the most efficient of ways. Cisco designs, manufactures and sells internet protocol-based networking and other products related to the communications and information technology industries worldwide. However, the company is looking to build on its software line of products, which seems set to become the company's main business.
Cisco's transition to software is safe and sound
Over the last couple of years, Cisco has burned about $6 billion investing in software related companies as it seeks to exploit new areas within its scope. The company has slowly been transforming itself into software and cloud computing by acquiring companies involved in the two businesses. Nonetheless, the company's Chairman of the Board and CEO, John Chambers has cautioned against high expectations in the near term despite expressing optimism in the current progress.
In a recent conference call transcript, Chambers said, "we are moving rapidly to software. [Thirteen] out of the 14 acquisitions were software, cloud companies, which have had consistent revenue streams that are very predictable. The bad news is when you start from a low base - it takes you a while to get to a size where it really becomes material."
Cisco's router/switch business, which for so many years has been its major revenue contributor, has been on the decline over the recent past. In the most recent quarter results, the company's router/switch revenues accounted for less than 50 percent of the overall revenue. The current investment in software and cloud would see Cisco complement the loss in its router/switch business unit.
Cisco's transition would see it mount a formidable challenge against competition posed by the French Telecommunications solutions provider Alcatel-Lucent (NYSE:ALU), the struggling PC maker, Hewlett-Packard (NYSE:HPQ), and the California-based networking and communication devices company, Juniper Networks (NYSE:JNPR).
But how exactly are these so called competitors shaping out?
"From Paris with love"-Alcatel-Lucent recently received an upgrade from Bernstein Research on Friday, March 1, with the firm now rating the company at Market Perform, from Underperform. According to the research firm's note to investors, the company's new CEO is seen as a pivotal factor in the turnaround.
The company signed an agreement with Etisalat at the Barcelona Mobile World Congress on February 26, paving the way for Etisalat to extend its new 4G LTE service across Srilanka. On the other hand, Alcatel-Lucent will be active in providing Etisalat, the network solutions backed by its years of expertise in mobile broadband infrastructure. Following the agreement, Alcatel-Lucent, is likely to experience improvement in its operations in Asia-Pacific.
This is yet another muscle added to the French company, which is quite similar to Cisco's latest events in acquisitions. Both companies are looking to widen their total accessible market geographically and in terms of niche.
Hewlett-Packard, on the other hand, is looking to exploit other hardware opportunities after it launched an Android platform tablet to battle in the newfound niche in computing. The company has been facing a myriad of challenges of its own, with lay-offs resulting into high costs over the past six months. HP is more of a hardware company as compared to Cisco, which primarily deals with networking, and now software.
In addition to PC business, HP provides technologies, software, solutions, and services to individuals, businesses and government institutions, globally. The company is trading about 7x its forward price to earnings ratio while the industry average is about 1.03x. Its operating margin is pegged at 7.88 percent while the loss margin stands at 10 percent for the trailing 12-month period.
Juniper Networks, just like a majority of the rivals featured here, designs, develops, and sells products and services that provide network infrastructure for networking requirements of service providers. The California-based company has a Hold rating from analysts at TheStreet, despite reporting $2.85 billion in cash from the most recent quarter results.
The company has a profit margin of 4.27 percent and an operating margin of 8.18 percent well below Cisco figures of 19.72 percent and 22.68 percent respectively. However, the $10.42 billion cap company is about 10 times smaller than Cisco, which has a market cap of about $110 billion. It is definitely going to give Cisco a run for its money.
Is it time to bet on Cisco's bets? Here are some of its cloud and software bets...
Cognitive Security- Acquired Jan 29, 2013. Cognitive Security solution integrates a range of sophisticated software technologies to identify and analyze key IT security threats through advanced behavioral analysis of real-time data.
Intucell- Acquired Jan 23, 2013. The acquisition of Intucell enhances Cisco's commitment to global service providers by adding a critical network intelligence layer to manage and optimize spectrum, coverage and capacity, and ultimately the quality of the mobile experience.
Broadhop-Acquired Dec 18, 2012. Broadhop's widely deployed policy control solutions for mobile and fixed networks. It will be integrated with Cisco's Service Provider Mobility Group to provide service providers the flexibility to control, monetize and personalize the types of service they choose, on any network.
Meraki-Acquired Nov 18, 2012. Meraki is a leader in cloud networking. The acquisition of Meraki complements and expands Cisco's strategy to offer more software-centric solutions to simplify network management, help customers empower mobile workforce, and generate new revenue opportunities for partners.
The bottom Line
These are just but a few of Cisco's bets, which the company believes would be crucial during the transition period. Some media critics believe that the acquisition strategy is paying off generously. How long can the trend continue? Well, we will have to wait and see, but the company's fundamentals are nothing short of impressive.
Cognitive Security is definitely a brilliant acquisition. Technological advancements and the use of internet grows have weakened cyber security, and the acquisition of this company will help Cisco become a preferred choice for companies looking to curb this threat. This is a likely upside for Cisco. On the other hand, Broadhop and Intucell will be very useful in mobile support. The mobile devices industry boasts one of the highest growth rates, which is another plus for Cisco.
The acquisition of Meraki will come in handy in the cloud computing market as businesses switch from server-based storage systems to cloud-based storage. The fact that the latter is expected to result in exponential savings on fixed costs makes it, a lucrative business, going forward. This among other acquisitions make Cisco's bets worth betting on. I also do not see any of the tallied competitors stopping Cisco any time soon.